Bank Balance Sheet Constraints and Mutual Fund Fragility
51 Pages Posted: 11 Jun 2021 Last revised: 30 Sep 2023
There are 2 versions of this paper
Bank Balance Sheet Constraints and Mutual Fund Fragility
Bank Balance Sheet Constraints and Bond Liquidity
Date Written: May 31, 2021
Abstract
Using European data, we develop a methodology to connect individual bonds and dealer banks, utilizing two intuitive and striking patterns: the home bias and the persistence of underwriting relationships. Building on these connections, we show that the introduction of the leverage ratio for European banks had a large impact on bond liquidity. We also show that the bond mutual funds’ outflows following the 2020 pandemic outbreak affected substantially more mutual funds with larger exposures to dealer banks’ balance sheet constraints. These findings highlight the importance of interactions between the regulation of banks and financial fragility of non-banks.
Keywords: Bond liquidity; market-making; capital requirements; leverage ratio; mutual funds; COVID-19
JEL Classification: G12, G18, G21
Suggested Citation: Suggested Citation