Frictions in Shadow Banking: Evidence from the Lending Behavior of Money Market Funds
Ohio State University (OSU) - Department of Finance
Harvard Business School
September 10, 2012
Fisher College of Business Working Paper No. 2012-4
Charles A. Dice Working Paper No. 2012-03-004
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.
Number of Pages in PDF File: 49
Keywords: Money market mutual funds, European sovereign debt crisis, runs, contagion, risk taking
JEL Classification: G01, G18, G21, G28, G32
Date posted: January 26, 2012 ; Last revised: September 18, 2012
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