Know Your Customer: Informed Trading by Banks

Rainer Haselmann (), Christian Leuz and Sebastian Schreiber

No 30521, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This study analyzes information production and trading behavior of banks with lending relationships. We combine trade-by-trade supervisory data and credit-registry data to examine banks' proprietary trading in borrower stocks around a large number of corporate events. We find that relationship banks build up positive (negative) trading positions in the two weeks before events with positive (negative) news, even when these events are unscheduled, and unwind positions shortly after the event. This trading pattern is more pronounced when banks are likely to possess private information about their borrowers and cannot be explained by specialized expertise in certain industries or firms. The results suggest that banks' lending relationships inform their trading and underscore the potential for conflicts of interest in universal banking—a prominent concern in the regulatory debate for a long time. Our analysis also illustrates how combining large data sets can enhance the supervision of markets and financial institutions.

JEL-codes: G01 G14 G15 G18 G21 G24 G28 G38 K22 (search for similar items in EconPapers)
Date: 2022-09
New Economics Papers: this item is included in nep-ban, nep-ifn and nep-mst
Note: CF LE
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Working Paper: Know your customer: Informed trading by banks (2022)
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