Arbitrage Capital of Global Banks

Alyssa G. Anderson, Wenxin Du and Bernd Schlusche

No 28658, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E4 F3 G2 (search for similar items in EconPapers)
Date: 2021-04
New Economics Papers: this item is included in nep-ban, nep-cwa and nep-mac
Note: AP CF IFM ME
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