Securities Lending as Wholesale Funding: Evidence from the U.S. Life Insurance Industry
61 Pages Posted: 2 Dec 2015 Last revised: 7 Jan 2020
Date Written: December 14, 2019
The securities lending market for corporate bonds relies on the willingness of institutional investors to lend their bond holdings. Life insurers are major suppliers of bonds in the securities lending market. By lending their bonds against cash collateral, insurers create short-term liabilities that are prone to runs. We show that, controlling for bond borrowers' demand, the maturity of an insurer's cash collateral reinvestment portfolio determines its decision to lend individual bonds. Insurers' cash collateral reinvestment strategy, as part of their interest rate risk management, drives supply in the securities lending market. Our results suggest a new source of financial fragility.
Keywords: securities lending, wholesale funding, corporate bonds, repo, interest rate risk management, life insurers
JEL Classification: G11, G22, G23
Suggested Citation: Suggested Citation