The Impact of Private Money Creation: Asset Allocation and "Opacity Discount" in Bank Lending

Abstract

This paper examines how the private money creation function of financial intermediaries influences their asset composition and firms' cost of debt. Following Dang, Gorton, Holmström, and Ordonez (2017), we hypothesize that intermediaries create money-like liabilities by backing them with assets that are safe and opaque, thereby minimizing information sensitivity. Using a quasi-natural experiment-the 2014 U.S. MMF reform-we show that changes in the moneyness of MMF liabilities significantly impact their asset allocation. Institutional MMFs reduced their portfolio weight of opaque assets-defined as holdings not disclosed by the MMF-by 40%. Furthermore, firm-level analysis of syndicated loans and bond issuances reveals that positive information acquisition cost shocks to borrowers reduce the loan-bond spread-the relative cost of firm financing using bank loans versus the public bond market-highlighting the "opacity discount" in bank lending. Instrumental variable estimation and event studies support the causal interpretation of our findings.

Keywords: Private money, Money-like liabilities, Moneyness, Cost of debt, Opacity, Bank lending, Money market funds JEL Codes: G21, G23

JEL Classification: G21, G23