Banks as Patient Fixed-Income Investors

Samuel Hanson, Andrei Shleifer, Jeremy Stein and Robert Vishny

No 20288, NBER Working Papers from National Bureau of Economic Research, Inc

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 different ways. Traditional banks create safe claims by relying on deposit insurance, supported by costly equity capital. This structure allows bank 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 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.

JEL-codes: G2 G21 G23 (search for similar items in EconPapers)
Date: 2014-07
New Economics Papers: this item is included in nep-ban
Note: CF ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Published as Hanson, Samuel G. & Shleifer, Andrei & Stein, Jeremy C. & Vishny, Robert W., 2015. "Banks as patient fixed-income investors," Journal of Financial Economics, Elsevier, vol. 117(3), pages 449-469.

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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
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