The effect of issuer leverage on issuer bid and ask quotes for structured retail products

The financial institution that issues a structured retail product (SRP) becomes the dealer for that security. Issuer-dealer funding constraints can directly impact price quotes for SRPs. The 2007-2009 financial crisis diminished issuer funding liquidity, and both bid and ask quotes declined, with the decrease in bids being significantly greater than that for the asks. A reduction in the bid (ask) discourages (encourages) investor selling (buying) and helps preserve dealer capital. The SRP's intrinsic value places a bound on how far the ask needs to be reduced to induce investor buying. High-leverage (low-leverage) issuers are the most (least) financially constrained and decrease their bids by a significant 167% (nonsignificant 41%) compared to the pre-crisis average. The decrease in asks is nonsignificant for both groups.