Working Paper: NBER ID: w30521
Authors: Rainer Haselmann; Christian Leuz; Sebastian Schreiber
Abstract: This study analyzes information production and trading behavior of banks with lending relationships. We combine trade-by-trade supervisory data and credit-registry data to examine banks' proprietary trading in borrower stocks around a large number of corporate events. We find that relationship banks build up positive (negative) trading positions in the two weeks before events with positive (negative) news, even when these events are unscheduled, and unwind positions shortly after the event. This trading pattern is more pronounced when banks are likely to possess private information about their borrowers and cannot be explained by specialized expertise in certain industries or firms. The results suggest that banks' lending relationships inform their trading and underscore the potential for conflicts of interest in universal banking—a prominent concern in the regulatory debate for a long time. Our analysis also illustrates how combining large data sets can enhance the supervision of markets and financial institutions.
Keywords: Informed Trading; Banks; Lending Relationships; Conflicts of Interest; Proprietary Trading
JEL Codes: G01; G14; G15; G18; G21; G24; G28; G38; K22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| relationship banks (G21) | positive trading positions (G15) |
| relationship banks (G21) | negative trading positions (G19) |
| private information (D82) | informed trading (G14) |
| relationship banks (G21) | trading profitability (F14) |
| trading positions (F16) | unwind shortly after events (Y60) |
| relationship banks (G21) | likelihood of trading in correct direction (F17) |