Working Paper: NBER ID: w28658
Authors: Alyssa G. Anderson; Wenxin Du; Bernd Schlusche
Abstract: We show that the role of unsecured, short-term wholesale funding for global banks has changed significantly in the post-financial-crisis regulatory environment. Global banks mainly use such funding to finance liquid, near risk-free arbitrage positions—in particular, the interest on excess reserves arbitrage and the covered interest rate parity arbitrage. In this environment, we examine the response of global banks to a large negative wholesale funding shock as a result of the U.S. money market mutual fund reform implemented in 2016. In contrast to past episodes of wholesale funding dry-ups, we find that the primary response of global banks to the reform was a cutback in arbitrage positions that relied on unsecured funding, rather than a reduction in loan provision.
Keywords: money market mutual funds; wholesale funding; arbitrage
JEL Codes: E4; F3; G2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Funding supply from money market funds (MMFs) (E51) | Arbitrage capital (G19) |
| Funding supply from money market funds (MMFs) (E51) | Interest on excess reserves (IOER) arbitrage position (E43) |
| Funding supply from money market funds (MMFs) (E51) | Banks' loan provision (G21) |