Arbitrage Capital of Global Banks

Alyssa Anderson, Wenxin Du and Bernd Schlusche

Journal of Finance, 2025, vol. 80, issue 5, 2591-2638

Abstract: We study the impact of the U.S. money market fund reform implemented in October 2016 on global banks' funding supply and business activities. We show that the reform induced a large negative wholesale funding shock for global banks. In contrast to the conventional bank lending channel, 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. We discuss the role of postcrisis liquidity regulations and unconventional monetary policy in explaining our findings, and implications for banks' business models and deposit competition.

Date: 2025
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https://doi.org/10.1111/jofi.13478

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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:80:y:2025:i:5:p:2591-2638

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