Private Supply of Safe Assets: Shadow Banks versus Traditional Banks

Stefan Gissler, Marco Macchiavelli and Borghan Narajabad

AEA Papers and Proceedings, 2020, vol. 110, 477-81

Abstract: We show that the creation of private safe assets by shadow banks can decrease traditional banks' supply of safe assets. The 2014–2016 money fund reform created a large demand shock for safe assets, to which Federal Home Loan Banks (FHLBs) responded, expanding their balance sheets and increasing their issuance of short-term debt. To reduce the resulting interest rate risk, FHLBs shortened the repricing of their loans to banks. Focusing on small banks for which the reform was exogenous, we use a novel instrumental variable strategy to show that shadow banks create safe assets at the expense of banks' deposits.

JEL-codes: E43 G21 G28 L25 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1257/pandp.20201098

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