Know Your Customer: Informed Trading by Banks

71 Pages Posted: 16 Aug 2021 Last revised: 3 Apr 2023

See all articles by Rainer F. H. Haselmann

Rainer F. H. Haselmann

Goethe University Frankfurt - Faculty of Economics and Business Administration; Leibniz Institute for Financial Research SAFE

Christian Leuz

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Leibniz Institute SAFE; CESifo Research Network; Center for Financial Studies (CFS)

Sebastian Schreiber

Goethe University Frankfurt; Goethe University Frankfurt - Center for Advanced Studies - Foundations of Law & Finance (LawFin)

Date Written: March 2023

Abstract

This study analyzes information production and trading behavior of banks with lending relationships. We combine trade-by-trade supervisory data and credit-registry data to examine banks' proprietary trading in borrower stocks around a large number of corporate events. We find that relationship banks build up positive (negative) trading positions in the two weeks before events with positive (negative) news, even when these events are unscheduled, and unwind positions shortly after the event. This trading pattern is more pronounced when banks are likely to possess private information about their borrowers and cannot be explained by specialized expertise in certain industries or firms. The results suggest that banks' lending relationships inform their trading and underscore the potential for conflicts of interest in universal banking - a prominent concern in the regulatory debate for a long time. Our analysis also illustrates how combining large data sets can enhance the supervision of markets and financial institutions.

Keywords: Universal banks, bank regulation, big data, proprietary trading, Volcker Rule, insider trading, market supervision

Suggested Citation

Haselmann, Rainer F. H. and Leuz, Christian and Schreiber, Sebastian, Know Your Customer: Informed Trading by Banks (March 2023). LawFin Working Paper No. 22, European Corporate Governance Institute – Finance Working Paper No. 876/2023, Available at SSRN: https://ssrn.com/abstract=3903968 or http://dx.doi.org/10.2139/ssrn.3903968

Rainer F. H. Haselmann (Contact Author)

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Mertonstrasse 17-25
Frankfurt am Main, D-60325
Germany

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Christian Leuz

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-1996 (Phone)

HOME PAGE: http://faculty.chicagobooth.edu/christian.leuz/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI)

Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Leibniz Institute SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

CESifo Research Network

Poschinger Str. 5
Munich, DE-81679
Germany

Center for Financial Studies (CFS) ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Sebastian Schreiber

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Goethe University Frankfurt - Center for Advanced Studies - Foundations of Law & Finance (LawFin) ( email )

Theodor-W.-Adorno-Platz 3
60629 Frankfurt am Main
Germany

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