Spillovers of Funding Dry-Ups

Abstract

We uncover a new channel for spillovers of funding dry-ups. The 2016 US money market fund (MMF) reform exogenously reduced unsecured MMF funding for some banks. We use novel data to trace those banks to a platform for corporate deposit funding. We show that intensified competition for corporate deposits spilled the funding squeeze over to other banks with no MMF exposure. These banks paid more for deposits, and their pool of funding providers deteriorated. Moreover, their lending volumes and margins declined and their stocks underperformed. Our results suggest that banks' competitiveness in funding markets affect their competitiveness in lending markets.

Keywords: funding dry-ups, spillovers, money market funds, corporate deposits, dollar funding, competition

JEL Classification: G21, G28