Securities Trading by Banks and Credit Supply: Micro-Evidence from the Crisis

58 Pages Posted: 5 Nov 2020

See all articles by Puriya Abbassi

Puriya Abbassi

Deutsche Bundesbank

Rajkamal Iyer

Massachusetts Institute of Technology (MIT) - Sloan School of Management

José-Luis Peydró

Catalan Institution of Research and Advanced Studies (ICREA)

Francesc Tous

Bank of England

Multiple version iconThere are 3 versions of this paper

Date Written: March, 2016

Abstract

We analyze securities trading by banks during the crisis and the associated spillovers to the supply of credit. We use a proprietary dataset that has the investments of banks at the security level for 2005-2012 in conjunction with the credit register from Germany. We find that – during the crisis – banks with higher trading expertise (trading banks) increase their investments in securities, especially in those that had a larger price drop, with the strongest impact in low-rated and long-term securities. Moreover, trading banks reduce their credit supply, and the credit crunch is binding at the firm level. All of the effects are more pronounced for trading banks with higher capital levels. Finally, banks use central bank liquidity and government subsidies like public recapitalization and implicit guarantees mainly to support trading of securities. Overall, our results suggest an externality arising from fire sales in securities markets on credit supply via the trading behavior of banks.

Keywords: banking, investments, bank capital, credit supply, risk-taking, public subsidies

JEL Classification: G01, G21, G28

Suggested Citation

Abbassi, Puriya and Iyer, Rajkamal and Peydró, José-Luis and Tous, Francesc, Securities Trading by Banks and Credit Supply: Micro-Evidence from the Crisis (March, 2016). ESRB: Working Paper Series No. 2016/05, Available at SSRN: https://ssrn.com/abstract=3723352

Puriya Abbassi (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany
00496965993708 (Phone)

Rajkamal Iyer

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

José-Luis Peydró

Catalan Institution of Research and Advanced Studies (ICREA) ( email )

P/ Lluis Companys 23
Barcelona, 08010
Spain

Francesc Tous

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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