Banks as Patient Fixed-Income Investors

48 Pages Posted: 24 Jul 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: July 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 different ways. Traditional banks create safe claims by relying on deposit insurance, supported by costly equity capital. This structure allows bank 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 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

Hanson, Samuel Gregory and Shleifer, Andrei and Stein, Jeremy C. and Vishny, Robert W., Banks as Patient Fixed-Income Investors (July 2014). NBER Working Paper No. w20288. Available at SSRN: https://ssrn.com/abstract=2471181

Samuel Gregory Hanson (Contact Author)

Harvard University - Business School (HBS) ( email )

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Andrei Shleifer

Harvard University - Department of Economics ( email )

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Jeremy C. Stein

Harvard University - Department of Economics ( email )

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

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Robert W. Vishny

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER)

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