Securities Lending as Wholesale Funding: Evidence from the U.S. Life Insurance Industry

61 Pages Posted: 2 Dec 2015 Last revised: 7 Jan 2020

See all articles by Nathan Foley-Fisher

Nathan Foley-Fisher

Board of Governors of the Federal Reserve System

Borghan Narajabad

Board of Governors of the Federal Reserve System

Stephane Verani

Board of Governors of the Federal Reserve System

Multiple version iconThere are 3 versions of this paper

Date Written: December 14, 2019

Abstract

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

Foley-Fisher, Nathan and Narajabad, Borghan and Verani, Stephane, Securities Lending as Wholesale Funding: Evidence from the U.S. Life Insurance Industry (December 14, 2019). Available at SSRN: https://ssrn.com/abstract=2697203 or http://dx.doi.org/10.2139/ssrn.2697203

Nathan Foley-Fisher

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Borghan Narajabad

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Stephane Verani (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.federalreserve.gov/econresdata/stephane-verani.htm

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