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Banks as Patient Fixed Income Investors

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Author Info

  • Hanson, Samuel

    (Harvard University)

  • Shleifer, Andrei

    (Harvard University)

  • Stein, Jeremy C.

    ()
    (Board of Governors of the Federal Reserve System (U.S.))

  • Vishny, Robert W.

    (University of Chicago)

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 very different ways. Traditional banks create safe claims with a combination of costly equity capital and fixed income assets that allows their 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 cheap 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.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2014-15.

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Length: 49 pages
Date of creation: 10 Feb 2014
Date of revision:
Handle: RePEc:fip:fedgfe:2014-15

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Keywords: Banks; shadow banks; money creation;

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References

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  1. Holmström, Bengt, 2013. "Inside and Outside Liquidity," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262518536, December.
  2. John H. Cochrane, 2011. "Discount Rates," NBER Working Papers 16972, National Bureau of Economic Research, Inc.
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  4. Mitchell Berlin & Loretta J. Mester, 1998. "Deposits and relationship lending," Working Papers 98-22, Federal Reserve Bank of Philadelphia.
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  8. Alan Moreira & Alexi Savov, 2014. "The Macroeconomics of Shadow Banking," NBER Working Papers 20335, National Bureau of Economic Research, Inc.
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Cited by:
  1. Oliver Hart & Luigi Zingales, 2014. "Banks Are Where The Liquidity Is," NBER Working Papers 20207, National Bureau of Economic Research, Inc.
  2. Tri Vi Dang & Gary Gorton & Beng Holmstrom & Guillermo Ordonez, 2014. "Banks as Secret Keepers," PIER Working Paper Archive 14-022, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.

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