Frictions in Shadow Banking: Evidence from the Lending Behavior of Money Market Funds

Fisher College of Business Working Paper No. 2012-4

Charles A. Dice Working Paper No. 2012-03-004

49 Pages Posted: 26 Jan 2012 Last revised: 18 Sep 2012

See all articles by Sergey Chernenko

Sergey Chernenko

Purdue University - Department of Management

Adi Sunderam

Harvard University - Business School (HBS)

Date Written: September 10, 2012

Abstract

We document the consequences of money market fund risk taking during the European sovereign debt crisis. Using a novel data set of security-level holdings of prime money market funds, we show that funds with large exposures to risky Eurozone banks suffered significant outflows between June and August 2011. Due to credit market frictions, these outflows have significant spillover effects on other firms: non-European issuers that typically rely on these funds raise less financing in this period. The results are not driven by issuers' riskiness or exposure to Europe: for the same issuer, money market funds with greater exposure to Eurozone banks decrease their holdings more than other funds. We show that relationships are important in short-term credit markets so that these spillover effects cannot be seamlessly offset, even though issuers are large, highly rated firms. Our results illustrate that instabilities associated with money market funds persist despite recent changes to the regulations governing them.

Keywords: Money market mutual funds, European sovereign debt crisis, runs, contagion, risk taking

JEL Classification: G01, G18, G21, G28, G32

Suggested Citation

Chernenko, Sergey and Sunderam, Adi, Frictions in Shadow Banking: Evidence from the Lending Behavior of Money Market Funds (September 10, 2012). Fisher College of Business Working Paper No. 2012-4, Charles A. Dice Working Paper No. 2012-03-004, Available at SSRN: https://ssrn.com/abstract=1991171 or http://dx.doi.org/10.2139/ssrn.1991171

Sergey Chernenko (Contact Author)

Purdue University - Department of Management ( email )

West Lafayette, IN 47907-1310
United States
(765) 494-4413 (Phone)

HOME PAGE: http://www.sergeychernenko.com

Adi Sunderam

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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