Banks as Patient Fixed-Income Investors / Samuel G. Hanson, Andrei Shleifer, Jeremy C. Stein, Robert W. Vishny.

Format:

Book

Author/Creator:

Hanson, Samuel G.

Contributor:

National Bureau of Economic Research.

Shleifer, Andrei.

Stein, Jeremy C.

Vishny, Robert W.

Series:

Working Paper Series (National Bureau of Economic Research) no. w20288.

NBER working paper series no. w20288

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2014.

Summary:

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.

Notes:

Print version record

July 2014.