Financial Intermediation and Liquidity
Friday, Jan. 3, 2020 2:30 PM - 4:30 PM (PDT)
- Chair: Arvind Krishnamurthy, Stanford University
Heterogeneous Intermediary Asset Pricing
AbstractI show that the composition of the financial sector has important asset pricing implications beyond the health of the aggregate financial sector. To assess the impact of massive balance sheet adjustments within the intermediary sector during the Great Recession and resolve conflicting asset pricing evidence, I propose a dynamic asset pricing model with heterogeneous intermediaries facing financial frictions. Asset flows between intermediaries are quantitatively important for both level and variation of risk premia. An empirical measure of the composition of the intermediary sector negatively forecasts future excess returns and is priced in the cross-section with a positive price of risk.
The Passthrough of Treasury Supply to Bank Deposit Funding
AbstractWe demonstrate the passthrough of Treasury supply to deposit funding through bank market power. We show that an increase in Treasury supply leads to a net deposit outflow. At the same time, reliance on wholesale funding decreases. The effect is heterogeneous in nature - banks in more competitive markets experience larger outflows. The explanatory power of Treasury supply is not driven by monetary policy and bank-specific investment opportunities. Our empirical findings are rationalized with a model of imperfect deposit competition. Consistent with The Deposits Channel of Monetary Policy (Drechsler et al., 2017), the model and empirics predict the opposite effect for Fed Fund rate hikes: there is a larger response in less competitive markets. Our results also shed light on the effect of the Reverse Repurchase (RRP) Facility on monetary policy passthrough.
AbstractThis paper models an unexplored source of liquidity risk faced by large broker-dealers: collateral runs. By setting different contracting terms on repurchase agreements with cash borrowers and lenders, dealers can source funds for their own activities. Cash borrowers internalize the risk of losing their collateral in case their dealer defaults, prompting them to withdraw it. This incentive creates strategic complementarities for counterparties to withdraw their collateral, reducing a dealer's liquidity position and compromising their solvency. Collateral runs are markedly different than traditional wholesale funding runs because they are triggered by a contraction in dealers' assets. Mitigating these risks involve different policy recommendations.
- G2 - Financial Institutions and Services