Securities Trading by Banks and Credit Supply: Micro-Evidence from the Crisis

66 Pages Posted: 27 Feb 2015 Last revised: 30 Oct 2015

See all articles by Puriya Abbassi

Puriya Abbassi

Deutsche Bundesbank

Rajkamal Iyer

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Jose-Luis Peydro

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Barcelona Graduate School of Economics (Barcelona GSE); Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Centre for Economic Policy Research (CEPR)

Francesc Rodriguez Tous

Cass Business School

Multiple version iconThere are 2 versions of this paper

Date Written: September 30, 2015

Abstract

We analyze securities trading by banks during the crisis and the associated spillovers to the supply of credit. For identification, we use a proprietary dataset that has the investments of banks at the security level for 2005-2012 in conjunction with the credit register from Germany. We find that – during the crisis – banks with higher trading expertise (trading banks) increase their investments in securities, especially in those that had a larger price drop, with the strongest impact in low-rated and long-term securities. Moreover, trading banks reduce their credit supply, and the credit crunch is binding at the firm level. All of the effects are more pronounced for trading banks with higher capital levels. Finally, banks use central bank liquidity and government subsidies like public recapitalization and implicit guarantees mainly to support trading of securities. Overall, our results suggest an externality arising from fire sales in securities markets on credit supply via the trading behavior of banks.

Keywords: banking, investments, bank capital, credit supply, risk-taking, public subsidies

JEL Classification: G01, G21, G28

Suggested Citation

Abbassi, Puriya and Iyer, Rajkamal and Peydro, Jose-Luis and Rodriguez Tous, Francesc, Securities Trading by Banks and Credit Supply: Micro-Evidence from the Crisis (September 30, 2015). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2570763 or http://dx.doi.org/10.2139/ssrn.2570763

Puriya Abbassi (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany
00496965993708 (Phone)

Rajkamal Iyer

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Jose-Luis Peydro

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, Barcelona 08005
Spain
(+34) 93 542 1756 (Phone)
(+34) 93 542 1746 (Fax)

HOME PAGE: http://https://sites.google.com/site/joseluispeydroswebpage/

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

HOME PAGE: http://www.barcelonagse.eu/Faculty.php?id=432

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Francesc Rodriguez Tous

Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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