Working Paper: NBER ID: w22774
Authors: Nathan Foleyfisher; Borghan Narajabad; Stephane Verani
Abstract: The existing literature assumes that securities lenders primarily respond to demand from securities borrowers and reinvest their cash collateral in short-term markets. We offer compelling evidence for a supply channel, using new data matching U.S. life insurers' individual bond lending and reinvestment decisions to the universe of securities lending transactions. We show that an insurer's decision to lend a bond is positively correlated with liquidity transformation in its lending program, even after controlling for demand for that bond. We discuss how using securities lending cash collateral as a source of wholesale funding might impair securities markets in times of stress.
Keywords: securities lending; wholesale funding; liquidity transformation; life insurance
JEL Codes: G11; G22; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Securities lenders' reinvestment strategies are not solely demand-driven (G19) | Importance of liquidity transformation in decision-making process (G11) |
| Insurer's decision to lend a particular bond (G22) | Degree of liquidity transformation in cash collateral reinvestment strategy (G19) |
| Degree of liquidity transformation in cash collateral reinvestment strategy (G19) | Likelihood of lending a bond (G12) |