Intermediary capitalization and asset demand

We study if and how intermediary capitalization affects asset demand and prices. We introduce a model with strategic but capital-constrained intermediaries to show that lower capitalization or weaker capital requirements lead intermediaries to demand more of the asset at higher prices because it becomes cheaper to do so. This increases the asset's price via market clearing. We test these predictions with data on Canadian Treasury auctions, where we can link asset demand to balance sheet information of individual intermediaries. Our findings provide new evidence on the extent to which asset prices are shaped by intermediaries’ preferences and constraints