Banks as patient fixed-income investors

• Published in: Journal of financial economics Vol. 117; no. 3; pp. 449 - 469
• Main Authors: Hanson, Samuel G., Shleifer, Andrei, Stein, Jeremy C., Vishny, Robert W.
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.09.2015; Elsevier Sequoia S.A
• Subjects: Business models; Commercial banking; Commercial banks; Comparative advantage; Competition; Deposit insurance; Income; Informal economy; Investors; Planning methods; Safe money-like claims; Shadow banking; Studies; Commercial banking; Shadow banking; G01; G23; Safe money-like claims; G21
• ISSN: 0304-405X; 1879-2774
• DOI: 10.1016/j.jfineco.2015.06.015

We examine the business model of traditional commercial banks when they compete with shadow banks. While both types of intermediaries create safe “money-like” claims, they go about this in different ways. Traditional banks create money-like claims by holding illiquid fixed-income assets to maturity, and they rely on deposit insurance and costly equity capital to support this strategy. This strategy allows bank depositors to remain “sleepy”: they do not have to pay attention to transient fluctuations in the market value of bank assets. In contrast, shadow banks create money-like claims by giving their investors an early exit option requiring the rapid liquidation of assets. Thus, traditional banks have a stable source of funding, while shadow banks are subject to runs and fire-sale losses. In equilibrium, traditional banks have a comparative advantage at holding fixed-income assets that have only modest fundamental risk but are illiquid and have substantial transitory price volatility, whereas shadow banks tend to hold relatively liquid assets.