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  5. Banking: Risk Management
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Banking: Risk Management

Paper Session

Tuesday, Jan. 5, 2021 12:15 PM - 2:15 PM (EST)

Hosted By: American Finance Association
  • Chair: Elena Loutskina, University of Virginia

Bank Debt versus Mutual Fund Equity in Liquidity Provision

Yiming Ma
,
Columbia University
Kairong Xiao
,
Columbia University
Yao Zeng
,
University of Washington

Abstract

We propose a unified framework to compare and quantify liquidity provision by debt-issuing banks and equity-issuing mutual funds. We show that both types of financial intermediaries provide liquidity by insuring against idiosyncratic liquidity risks. However, they are subject to distinct constraints depending on the contractual form of their liabilities. Banks issue demandable debt, which exposes them to the possibility of panic runs, whereas funds issue demandable equity, which leads to fundamentals-driven outflows. Based on our theoretical framework, we develop the first empirical measure of liquidity provision that can be generally applied across demandable-debt- and demandable-equity-issuing financial institutions: the Liquidity Provision Index (LPI). We find that a dollar invested in bond mutual funds provides 4.8 cents of liquidity, which is economically significant at one-quarter of the liquidity provided by uninsured bank deposits at the end of 2017. The gap between bank and fund liquidity provision has continuously narrowed over time, suggesting a migration of liquidity provision away from the deposit-taking banking sector to equity-funded non-banks. We find Quantitative Easing and post-crisis liquidity regulation to be contributing factors for this trend. Finally, we exploit the 2016 Money Market Reform, in which institutional prime Money Market Funds (MMF) switched from a fixed to a floating share value, to corroborate the effect of contractual forms on liquidity provision.

Shareholder Liability and Bank Failure

Felipe Aldunate
,
Pontifical Catholic University of Chile
Dirk Jenter
,
London School of Economics
Arthur Korteweg
,
University of Southern California
Peter Koudijs
,
Stanford University

Abstract

Does additional shareholder liability reduce bank failure? We compare the performance of around 4,400 state-regulated banks of similar size in neighboring U.S. states with different liability regimes during the Great Depression. Additional shareholder liability reduced bank failure by 30%. Results are robust to a diff-in-diff analysis incorporating National banks (which faced the same regulations in every state) and are not driven by other differences in state regulations, Fed membership, local characteristics, or differential selection into state- and nationally- regulated banks. Our results suggest that exposing shareholders to more downside risk can be a useful tool to reduce bank risk taking.

Big Broad Banks: How Does Cross-Selling Affect Lending?

Yingjie Qi
,
Copenhagen Business School

Abstract

Using unique micro-data that contain the internal information on all corporate customers of a large Northern European bank, I show that combining loan and non-loan products (cross-selling) has two benefits. First, it increases credit supply, especially in recessions. Second, it increases the likelihood of receiving lenient treatment in delinquency. I argue that non-loan relationships play an important role in determining credit supply and debt renegotiation, not only by (i) mitigating information asymmetries (as suggested in earlier literature), but also by (ii) increasing the profitability of the relationship. Exploiting an exogenous and differential change in certain products' profitability due to the Basel II implementation, I estimate the causal effect of this new profit channel on credit supply. A 20 percent decrease in non-loan products' profitability (1) reduces credit supply to affected firms by 10.5 percent (500,000 USD) compared with unaffected firms, and (2) reduces likelihood of receiving lenient treatment for affected firms by 58 percent (23 pp) compared with unaffected firms, conditional on being delinquent.
Discussant(s)
Douglas Diamond
,
University of Chicago
Justin Murfin
,
Cornell University
Philip Strahan
,
Boston College
JEL Classifications
  • G2 - Financial Institutions and Services