Banks as Patient Fixed Income Investors

49 Pages Posted: 1 Mar 2014

See all articles by Samuel Gregory Hanson

Samuel Gregory Hanson

Harvard University - Business School (HBS)

Andrei Shleifer

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Jeremy C. Stein

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Robert W. Vishny

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: February 19, 2014

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 ass ets that have only modest fundamental risk, but are relatively illiquid and have substantial transitory price volatility.

Keywords: Banks, shadow banks, money creation

JEL Classification: E44, E51, G21

Suggested Citation

Hanson, Samuel Gregory and Shleifer, Andrei and Stein, Jeremy C. and Vishny, Robert W., Banks as Patient Fixed Income Investors (February 19, 2014). FEDS Working Paper No. 2014-15. Available at SSRN: https://ssrn.com/abstract=2402360 or http://dx.doi.org/10.2139/ssrn.2402360

Samuel Gregory Hanson

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
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Andrei Shleifer

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
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617-496-1708 (Fax)

HOME PAGE: http://www.economics.harvard.edu/~ashleife/

National Bureau of Economic Research (NBER)

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European Corporate Governance Institute (ECGI)

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Jeremy C. Stein (Contact Author)

Harvard University - Department of Economics ( email )

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United States
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617-496-7352 (Fax)

HOME PAGE: http://post.economics.harvard.edu/faculty/stein/stein.html

National Bureau of Economic Research (NBER)

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Robert W. Vishny

University of Chicago - Booth School of Business ( email )

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Chicago, IL 60637
United States
312-702-2522 (Phone)
312-702-0118 (Fax)

National Bureau of Economic Research (NBER)

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United States

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