On December 22, the Board of Governors of the Federal Reserve System released a staff working paper entitled “The Volcker Rule and Market Making in Times of Stress”. In view of the recently renewed debate over the possible amendment or repeal of the Volcker Rule, the conclusion reached is striking:

Our main finding is that the Volcker Rule has a deleterious effect on corporate bond liquidity and dealers subject to the Rule become less willing to provide liquidity during stress times. While dealers not affected by the Volcker Rule have stepped in to provide liquidity, we find that the net effect is a less liquid corporate bond market. We also rule out that the effects are due to the implementation of Basel III in conjunction with CCAR requirements.