Banks as patient fixed-income investors

By S. Hanson, A. Shleifer, Jeremy C. Stein, Robert W. Vishny. 2014

286 citations recorded by the source corpus.

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.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/5c064f5671d4ccfe5bd1267b90ec5aad44a4fd1a

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Citations in the corpus

Deposit Competition and Financial Fragility: Evidence from the US Banking Sector (2017, background): “Last, we characterize the equilibrium deposit rates and default decisions of a bank, given depositors’ rational expectations of default decisions.”
Credit Supply and Housing Speculation (2018, unknown): “, Keys et al. (2010), Mayer et al. (2009), Keys et al. (2012), Demyanyk and Van Hemert (2011), Purnanandam (2011), Dell’Ariccia et al.”
Measuring Liquidity Mismatch in the Banking Sector: Measuring Liquidity Mismatch in the Banking Sector (2017, background): “Cornett et al. (2011), Hanson et al. (2015), and Krishnamurthy and Vissing-Jorgensen (2015) all study banks’ asset liquidity choices jointly with their liabilities.3 In a world where bank assets and liabilities are jointly determined, it is most natural to focus on a single measure of bank…”
Double Bank Runs and Liquidity Risk Management (2016, background): “19 In Iyer and Peydró (2011) depositors know about the interbank exposure of their bank to a failed bank partially through voluntary disclosure by banks, partially through monitoring (Calomiris and Kahn, 1991), and partially via rumors and word-of-mouth (Kelly and Grada, 2000; Iyer and Puri, 2012).”
The Rise of Shadow Banking: Evidence from Capital Regulation (2018, background): “(10)Hanson et al. (2015) argue that traditional banks’ stable funding makes them “patient” fixed income investors, better equipped to ride out temporary fluctuations in market prices than shadow banks.”