|Researchers:||Iñaki Aldasoro, Florian Balke, Andreas Barth, Egemen Eren|
We study the dynamics of funding dry-ups and their adverse macroeconomic consequences by exploiting a policy event that led to a wholesale funding shortfall in only one market during an otherwise tranquil period.
As the policy event in a difference-in-differences framework, we use the US Money Market Fund (MMF) reform that was implemented in October 2016. The reform was adopted in order to curb the run-prone nature of MMFs. In response, fund families converted prime funds into government funds, which, in effect, replaced the provision of unsecured funding to banks with buying government securities. The reform resulted in an aggregate loss of around 350 billion dollar in unsecured dollar funding for global banks with MMF exposure.
The reform constitutes close to an ideal setting to study channels of spillovers from a funding squeeze. In addition to taking place during an otherwise tranquil period for financial markets, it directly affected only banks that actively borrow from MMFs (which we call MMF banks). This allows for a clear distinction between MMF banks and banks with no direct exposure to MMFs (which we call non-MMF banks). Moreover, since it only affected the dollar wholesale funding of banks, the reform should only have an impact in dollar markets and not in other currencies. These features and the richness of our dataset allow us to cleanly identify spillovers, as the impact of the reform on non-MMF banks should only be through spillovers in dollar funding markets.
We combine three granular datasets to study spillovers in funding markets and their effect on bank lending. First, we identify banks that suffered a loss in dollar funding due to the reform by using transaction-level data from the regulatory filings of US MMFs. Second, we use a unique and granular dataset from one of the largest corporate deposit trading platforms located in Europe. In the platform, firms auction deposits and banks bid for them. The dataset contains bid-level information on deposit auctions in various currencies, with the largest transaction volumes in dollar, euro, and pound. Our main focus is on transactions in dollar since the reform induced a wholesale dollar funding shortage. However, we use the information on deposits in other currencies as a key robustness check, which allows us to show that spillovers occur only for banks' dollar funding. Third, we use data on syndicated loans to study changes in the lending behavior of banks in our sample.
We use an empirical design in the spirit of Khwaja and Mian (2008) to control for loan demand and compare the same firm borrowing in dollar from MMF and non-MMF banks. In this way, we rule out that potential confounding effects related to firms' demand for loans from non-MMF banks might be driving the results. On the liability side, non-MMF banks pay more for funding, and at the same time, their lending mark-ups decrease, leading to a relative decline in profit margins. Taken together, the results point to a loss of competitiveness in lending markets driven by the loss of competitiveness in funding markets.
Our paper provides new insights into corporate deposit markets using a unique and granular dataset. Despite their increasing importance and potential to lead to financial instability, data unavailability has previously hindered to study these markets. However, while our dataset provides rich information, it only covers a small segment of the market for corporate deposits. Future research using other segments of corporate deposit markets would be useful to understand these markets and how they might affect financial stability.
|259||Iñaki Aldasoro, Florian Balke, Andreas Barth, Egemen Eren||Spillovers of Funding Dry-ups||2019||Financial Intermediation|