Sources of Funding in a Crisis: Evidence from Investment Banks

Jean Helwege () and Jan Jindra ()
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Jean Helwege: University of California, Riverside, CA 92508, USA
Jan Jindra: U.S. Securities and Exchange Commission, 44 Montgomery Street 2800, San Francisco, CA 94104, USA

Quarterly Journal of Finance (QJF), 2023, vol. 13, issue 03, 1-44

Abstract: In this paper, we evaluate changes in investment bank balance sheets to determine how these firms respond to shocks in a financial crisis. Contrary to theories that emphasize liquidity problems, we find that most investment banks maintain funding levels during these downturns. Investment banks typically respond to shocks with a shift into deposits or by raising equity, rather than selling assets at a loss. We do not find strong evidence of fire sales, as asset declines mainly reflect write-downs rather than sales at unusually low prices. Write-downs are combined with strategic use of Level 3 assets, suggesting that banks mask insolvency. Investment banks often rely on cherry picking of assets in order to boost reported capital in a downturn.

Keywords: Investment banks; Level 3 assets; funding shocks; credit risk; liquidity shocks; fire sales; financial crisis (search for similar items in EconPapers)
JEL-codes: E44 E58 E61 G21 G24 G28 G32 G33 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1142/S2010139223500088

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