Financial Intermediation: Bank Funding and Risk Management
Paper Session
Friday, Jan. 5, 2024 8:00 AM - 10:00 AM (CST)
- Chair: Juliane Begenau, Stanford University
Intermediary Market Power and Capital Constraints
Abstract
We study if and how intermediary capitalization affects asset prices in a framework that allows for intermediary market power. We show that weaker capital requirements lead to higher prices (lower yields) but greater markups due to market power. We test these predictions and calibrate the model with data on Canadian Treasury auctions, where we can link asset demand to balance sheet information of individual intermediaries. Our findings imply that weaker capital constraints lead to higher auction revenues and thus savings for the government at an implicit cost of larger yield distortion.Similar Investors
Abstract
Do investors internalize concentration risk in bank liabilities? We use detailed security-level holdings of U.S. Money Market Mutual Funds (MMFs) that fund banks to introduce a novel measure of portfolio similarity among investors. Our findings suggest that MMFs actively manage their asset holdings based on the similarity of their portfolios with those of other investors. Specifically, when portfolios are more similar, investors are less likely to roll over investments, anticipating higher expected joint liquidation costs when portfolios are more similar. At the issuer bank level, the average similarity of its investors' portfolios is a reliable predictor of the bank’s total funding in the following period. Importantly, banks are unable to fully compensate for the loss of funding when similar investors withdraw. These findings have significant implications for financial stability and highlight the potential role of deposit concentration in the collapse of Silicon Valley Bank (SVB) in March 2023.Discussant(s)
Dominik Supera
,
Columbia University
Rustam Jamilov
,
University of Oxford
Yao Zeng
,
University of Pennsylvania
JEL Classifications
- G2 - Financial Institutions and Services