Arbitrage Capital of Global Banks

66 Pages Posted: 14 Jun 2021 Last revised: 30 Jun 2021

See all articles by Alyssa G. Anderson

Alyssa G. Anderson

Board of Governors of the Federal Reserve System

Wenxin Du

University of Chicago Booth School of Business

Bernd Schlusche

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: May, 2021

Abstract

We show that the role of unsecured, short-term wholesale funding for global banks has changed significantly in the post-financial-crisis regulatory environment. Global banks mainly use such funding to finance liquid, near risk-free arbitrage positions---in particular, the interest on excess reserves arbitrage and the covered interest rate parity arbitrage. In this environment, we examine the response of global banks to a large negative wholesale funding shock as a result of the U.S. money market mutual fund reform implemented in 2016. In contrast to past episodes of wholesale funding dry-ups, we find that the primary response of global banks to the reform was a cutback in arbitrage positions that relied on unsecured funding, rather than a reduction in loan provision.

JEL Classification: G20, F30, E40

Suggested Citation

Anderson, Alyssa G. and Du, Wenxin and Schlusche, Bernd, Arbitrage Capital of Global Banks (May, 2021). FEDS Working Paper No. 2021-32, Available at SSRN: https://ssrn.com/abstract=3865421 or http://dx.doi.org/10.17016/FEDS.2021.032

Alyssa G. Anderson (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
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Wenxin Du

University of Chicago Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://https://sites.google.com/site/wenxindu/

Bernd Schlusche

Board of Governors of the Federal Reserve System ( email )

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

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