Reciprocal Lending Relationships in Shadow Banking

59 Pages Posted: 1 Sep 2017 Last revised: 14 Sep 2020

See all articles by Yi Li

Yi Li

Board of Governors of the Federal Reserve System

Date Written: August 31, 2020

Abstract

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

Li, Yi, Reciprocal Lending Relationships in Shadow Banking (August 31, 2020). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3030331 or http://dx.doi.org/10.2139/ssrn.3030331

Yi Li (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-721-4576 (Phone)

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