Providing Safety in a Rush: How Did Shadow Banks Respond to a $1 Trillion Shock

55 Pages Posted: 5 Jun 2020 Last revised: 2 Aug 2023

See all articles by Stefan Gissler

Stefan Gissler

Board of Governors of the Federal Reserve System

Marco Macchiavelli

Isenberg School of Management

Borghan Narajabad

Board of Governors of the Federal Reserve System

Date Written: March 23, 2023

Abstract

This paper examines the challenges faced by government money market funds (MMFs) in maintaining their safety during flight-to-liquidity events. Using exogenous variation in both demand for government MMF shares and the supply of Treasury bills, we show that Treasury securities are insufficient to accommodate MMFs' needs in a flight to liquidity. Instead, MMFs rely on the Federal Home Loan Banks (FHLBs). FHLBs not only offer large amounts of safe assets on short notice, but also securities with features not offered by Treasury securities or repo that allow MMFs to manage liquidity and interest rate risks.

Keywords: money markets, safe assets, shadow banks, interest rate risk, covid-19

JEL Classification: G23, G28, E41

Suggested Citation

Gissler, Stefan and Macchiavelli, Marco and Narajabad, Borghan, Providing Safety in a Rush: How Did Shadow Banks Respond to a $1 Trillion Shock (March 23, 2023). Available at SSRN: https://ssrn.com/abstract=3595417 or http://dx.doi.org/10.2139/ssrn.3595417

Stefan Gissler (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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

Marco Macchiavelli

Isenberg School of Management ( email )

Amherst, MA 01003
United States

Borghan Narajabad

Board of Governors of the Federal Reserve System ( email )

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

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