The events in corporate bond markets in the US in March and April of 2020, as the Covid-19 crisis erupted and threatened the world economy, exposed key fragilities from the liquidity transformation that is performed in these markets. Now, a year later, the debate is still raging about the takeaways from these events and the need for future reforms.
One of the key functions of financial intermediation is the transformation of liquidity. Financial intermediaries hold illiquid assets, but allow their investors access to ample liquidity, as they can withdraw their money at short notice. Traditionally, this role was performed mostly by banks, which finance long-term illiquid loans with deposits. Over the years, other market intermediaries stepped in to perform a similar role.
