Shadow Funding Costs: Measuring the Cost of Balance Sheet Constraints / Matthias Fleckenstein, Francis A. Longstaff.

Format:

Book

Author/Creator:

Fleckenstein, Matthias.

Contributor:

National Bureau of Economic Research.

Longstaff, Francis A.

Series:

Working Paper Series (National Bureau of Economic Research) no. w24224.

NBER working paper series no. w24224

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Shadow Funding Costs

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2018.

Summary:

Recent theory suggests that balance sheet frictions and constraints faced by financial intermediaries can have major asset pricing implications. We propose a new measure of the impact of these constraints on intermediary funding costs that is based on the implied cost of renting intermediary balance sheet space. On average, balance sheet constraints add 81 basis points to intermediary funding costs, but the impact often exceeds 200 basis points during a crisis. We find that these balance sheet costs have real effects on intermediary investment decisions and asset holdings. Increases in balance sheet costs are associated with short-term increases in the use of derivatives, but longer-term declines in risk-taking by financial institutions. Balance sheet costs introduce a wedge between on- and off-balance-sheet investments which may help resolve a number of asset pricing puzzles.

Notes:

Print version record

January 2018.