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Banks as Patient Fixed Income Investors

Author

Listed:
  • Samuel Hanson
  • Andrei Shleifer
  • Jeremy C. Stein
  • Robert W. Vishny
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.

Suggested Citation

  • Samuel Hanson & Andrei Shleifer & Jeremy C. Stein & Robert W. Vishny, 2014. "Banks as Patient Fixed Income Investors," Finance and Economics Discussion Series 2014-15, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2014-15
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    More about this item

    Keywords

    Banks; shadow banks; money creation;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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