Banks as Patient Fixed Income Investors

Samuel Hanson, Andrei Shleifer, Jeremy Stein and Robert Vishny

No 2014-15, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We examine the business model of traditional commercial banks in the context of their co-existence with shadow banks. While both types of intermediaries create safe \"money-like\" claims, they go about this in very different ways. Traditional banks create safe claims with a combination of costly equity capital and fixed income assets that allows their depositors to remain \"sleepy\": they do not have to pay attention to transient fluctuations in the mark-to-market value of bank assets. In contrast, shadow banks create safe claims by giving their investors an early exit option that allows them to seize collateral and liquidate it at the first sign of trouble. Thus traditional banks have a stable source of cheap funding, while shadow banks are subject to runs and fire-sale losses. These different funding models in turn influence the kinds of assets that traditional banks and shadow banks hold in equilibrium: traditional banks have a comparative advantage at holding fixed-income assets that have only modest fundamental risk, but are relatively illiquid and have substantial transitory price volatility.

Keywords: Banks; shadow banks; money creation (search for similar items in EconPapers)
Pages: 49 pages
Date: 2014-02-10
New Economics Papers: this item is included in nep-ban
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://www.federalreserve.gov/pubs/feds/2014/201415/201415pap.pdf Full text (application/pdf)

Related works:
Journal Article: Banks as patient fixed-income investors (2015)
Working Paper: Banks as Patient Fixed-Income Investors (2014)
Working Paper: Banks as Patient Fixed Income Investors (2014)
Working Paper: Banks as patient fixed-income investors
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2014-15

Access Statistics for this paper

More papers in Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().