Arbitrage Capital of Global Banks

Alyssa G. Anderson, Wenxin Du and Bernd Schlusche
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Alyssa G. Anderson: https://www.federalreserve.gov/econres/alyssa-g-anderson.htm
Bernd Schlusche: https://www.federalreserve.gov/econres/bernd-schlusche.htm

No 2021-032, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We show that the role of unsecured, short-term wholesale funding for global banks has changed significantly in the post-financial-crisis regulatory environment. Global banks mainly use such funding to finance liquid, near risk-free arbitrage positions---in particular, the interest on excess reserves arbitrage and the covered interest rate parity arbitrage. In this environment, we examine the response of global banks to a large negative wholesale funding shock as a result of the U.S. money market mutual fund reform implemented in 2016. In contrast to past episodes of wholesale funding dry-ups, we find that the primary response of global banks to the reform was a cutback in arbitrage positions that relied on unsecured funding, rather than a reduction in loan provision.

Keywords: Money market mutual funds; Wholesale funding; Arbitrage (search for similar items in EconPapers)
JEL-codes: E40 F30 G20 (search for similar items in EconPapers)
Pages: 66 p.
Date: 2021-05-14
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cwa and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2021-32

DOI: 10.17016/FEDS.2021.032

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