BIS paper tracks new channel for funding ‘dry-ups’

Funding “dry-ups” in particular markets can spread to firms with no direct exposure to the troubled market, research published by the Bank for International Settlements finds.

Iñaki Aldasoro, Florian Balke, Andreas Barth and Egemen Eren note it can be hard to isolate the effects of a dry-up from the broader effects of a financial crisis, as the two often go hand-in-hand. To avoid this they focus on a particular episode in which reforms to US money market funds (MMFs) caused a funding squeeze in otherwise “tranquil” conditions.

Banks that were active in sourcing funding from MMFs were forced to seek other sources of funds, the authors find. The consequent competition for deposit funding pushing up funding costs for all institutions.

The authors find that banks with no MMF exposure saw their lending volumes and margins decrease after the reforms, while their stocks underperformed. The authors say there was no significant change in their riskiness, however.