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Financial Intermediation: Bank Funding and Risk Management

Paper Session

Friday, Jan. 5, 2024 8:00 AM - 10:00 AM (CST)

Marriott Rivercenter, Grand Ballroom Salon D
Hosted By: American Finance Association
  • Chair: Juliane Begenau, Stanford University

Local Recessions: Evidence from Bank Liquidity Squeezes

Rajkamal Iyer
Imperial College London
Shohini Kundu
University of California-Los Angeles
Nikos Paltalidis
Durham University


This paper investigates the relation between bank liquidity and local business cycles. Our findings suggest that an increase in the dispersion of deposit rates offered by banks within a geographic area accurately predicts the onset of local recessions and the severity of the downturn over long time horizons. As a region heads to a recession, deposit growth slows down and banks differentially increase deposit rates to support their balance sheet. The increased dispersion of deposit rates reflects the liquidity squeeze faced by banks as a result of deteriorating economic conditions, in turn, signaling an oncoming recession. Our results hold important policy implications.

Intermediary Market Power and Capital Constraints

Jason Allen
Bank of Canada
Milena Wittwer
Boston College


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

Co-Pierre Georg
EDHEC Business School
Diane Pierret
University of Luxembourg
Sascha Steffen
Frankfurt School of Finance and Management


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.

Dominik Supera
Columbia University
Rustam Jamilov
University of Oxford
Yao Zeng
University of Pennsylvania
JEL Classifications
  • G2 - Financial Institutions and Services