Frictions in Shadow Banking: Evidence from the Lending Behavior of Money Market Mutual Funds

Chernenko, Sergey; Sunderam, Aditya

doi:10.1093/rfs/hhu025

Cited by 188 publications

(114 citation statements)

References 53 publications

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“…Source: ECB website. 4 In the six months preceding the LTRO, from June 2011 to December 2011, we observe a significant contraction of foreign deposits (mainly certificates of deposit and commercial paper held in the U.S.) and eurozone centrally cleared repurchase agreements (Chernenko and Sunderam (2014)). demanding more.…”

Section: Supply the Intervention Called The Three-year Long Term Rementioning

confidence: 95%

The Effect of Central Bank Liquidity Injections on Bank Credit Supply

Carpinelli

Crosignani

2017

FEDS

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We study the effectiveness of central bank liquidity injections in restoring bank credit supply following a wholesale funding dry-up. We combine borrower-level data from the Italian credit registry with bank security-level holdings and analyze the transmission of the European Central Bank three-year Long Term Refinancing Operation. Exploiting a regulatory change that expands eligible collateral, we show that banks more affected by the dry-up use this facility to restore their credit supply, while less affected banks use it to increase their holdings of high-yield government bonds. Unable to switch from affected banks during the dry-up, firms benefit from the intervention.JEL: E50, E58, G21, H63

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Section: Supply the Intervention Called The Three-year Long Term Rementioning

confidence: 95%

The Effect of Central Bank Liquidity Injections on Bank Credit Supply

Carpinelli

Crosignani

2017

FEDS

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“…These studies show that institutional investors can be extremely yield-sensitive; they appear willing to move large sums between MMFs in order to gain as little as 10 basis points of yield (Kacperzyck and Schnabl (2012) and Chernenko and Sunderam (2013) (Chernenko and Sunderam (2013)). …”

Section: Incentives For Mmf Risk-takingmentioning

confidence: 99%

“…It is also worth noting that institutional investors are the ones who most aggressively seek out yield in normal times and aggressively withdraw their funds in a crisis (Kacperzyck and Schnabl (2012) and Chernenko and Sunderam (2013)). These more sophisticated investors are likely aware of the risks involved in investing in MMFs and are tempted to take on these on the expectation that either (i) they will be able to withdraw their funds before losses are realized in a crisis or (ii) the MMF industry will receive government support in crisis because of its close links to the rest of the financial system.…”

Section: B Drawbacks Of a Floating Navmentioning

confidence: 99%

An Evaluation of Money Market Fund Reform Proposals

Hanson¹,

Scharfstein²,

Sunderam³

2015

IMF Econ Rev

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We analyze the leading reform proposals to address the structural vulnerabilities of money market mutual funds (MMFs). We assume that the main goal of MMF reform is safeguarding financial stability. In light of this goal, reforms should reduce the ex ante incentives for MMFs to take excessive risk and increase the ex post resilience of MMFs to system-wide runs. Our analysis suggests that requiring MMFs to have subordinated capital buffers could generate significant financial stability benefits. Subordinated capital provides MMFs with loss absorption capacity, lowering the probability that a MMF suffers losses large enough to trigger a run, and reduces incentives to take excessive risks. We estimate that a capital buffer in the range of 3 to 4% would significantly reduce the probability that ordinary MMF shareholders ever suffer losses. In exchange for having the safer investment product made possible by subordinated capital, the yield paid to ordinary MMFs shareholders would decline by only 0.05%. Other reform alternatives such as converting MMFs to a floating NAV would likely be less effective in protecting financial stability.

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“…Second, the European Central Bank (ECB) acted as a de facto supranational deposit insurance during the crisis providing liquidity to banks in peripheral countries against low-quality and illiquid collateral (Drechsler et al (2016), Crosignani et al (2017)). Third, external financing was extremely costly for peripheral banks during the crisis: they were unable to access private markets (Garcia-de Andoain et al (2016)) and were subject to runs (Chernenko and Sunderam (2014), Perignon et al (forthcoming)). …”

mentioning

confidence: 99%

Why Are Banks Not Recapitalized During Crises?

Crosignani

2017

FEDS

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I develop a model where the sovereign debt capacity depends on the capitalization of domestic banks. Low-capital banks optimally tilt their government bond portfolio toward domestic securities, linking their destiny to that of the sovereign. If the sovereign risk is sufficiently high, low-capital banks reduce private lending to further increase their holdings of domestic government bonds, lowering sovereign yields and supporting the home sovereign debt capacity. The model rationalizes, in the context of the eurozone periphery, the increase in domestic government bond holdings, the reduction of bank credit supply, and the prolonged fragility of the financial sector.JEL Codes: E44, F33, G21, G28

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Frictions in Shadow Banking: Evidence from the Lending Behavior of Money Market Mutual Funds

Cited by 188 publications

References 53 publications

The Effect of Central Bank Liquidity Injections on Bank Credit Supply

The Effect of Central Bank Liquidity Injections on Bank Credit Supply

An Evaluation of Money Market Fund Reform Proposals

Why Are Banks Not Recapitalized During Crises?

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