Similar Investors

Abstract

With the failure of Silicon Valley Bank in March 2023, the concentration risk in bank liabilities has come under scrutiny. We use detailed security-level holdings of U.S. Money Market Mutual Funds (MMFs) that fund banks to introduce a novel measure of portfolio similarity among investors. Our findings suggest that MMFs actively manage their asset holdings based on the similarity of their portfolios with those of other investors. Specifically, when portfolios are more similar, investors are less likely to roll over investments, anticipating higher expected joint liquidation costs when portfolios are more similar. At the issuer bank level, the average similarity of its investors' portfolios is a reliable predictor of the bank’s total funding in the following period. Importantly, banks are unable to fully compensate for the loss of funding when similar investors withdraw.

Keywords: concentration risk, institutional investors, liquidity risk, wholesale funding.

JEL Classification: G1, G21