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Journal of Financial Economics Vol. 141 No. 2 2021

Reciprocal lending relationships in shadow banking

Yi Li1,2

1 Federal Reserve · 2 Federal Reserve Board of Governors

Abstract

Postcrisis regulations apply stricter liquidity rules to both money market funds (MMFs) and banks, requiring MMFs to do more overnight lending and banks to borrow longer-term. MMFs and banks resolve this dilemma by developing a “bundling” strategy across overnight and longer term markets. In particular, MMFs increase longer term funding and charge a lower rate to banks that have recently accommodated MMFs’ overnight depositing needs. Such cross-market reciprocity is stronger between MMFs and foreign banks, which depend on MMFs for dollar funding more than U.S. banks do. MMFs with lower liquidity buffers and higher flow volatility are more likely to engage in bundling.

DOI
10.1016/j.jfineco.2021.04.004
Volume
141
Issue
2
Pages
600-619
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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