Reciprocal Lending Relationships in Shadow Banking
59 Pages Posted: 1 Sep 2017 Last revised: 14 Sep 2020
Date Written: August 31, 2020
Post-crisis regulations apply stricter liquidity rules to both money market funds (MMFs) and banks, requiring MMFs to do more overnight lending and banks to borrow longer-term. MMFs and banks resolve this dilemma by developing a "bundling" strategy across overnight and longer-term markets. In particular, MMFs increase longer-term funding and charge lower rate to banks that have recently accommodated MMFs' overnight depositing needs. Such cross-market reciprocity is stronger between MMFs and foreign banks, who depend on MMFs for dollar funding more than U.S. banks do. MMFs with lower liquidity buffers and higher flow volatility are more likely to engage in bundling.
Keywords: reciprocal relationship, money market funds, liquidity, regulation, wholesale funding
JEL Classification: G20, G18, G40
Suggested Citation: Suggested Citation