Arbitrage Capital of Global Banks

Arbitrage Capital of Global Banks

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.

Alyssa G. Anderson, Wenxin Du, and Bernd Schlusche


April 2021

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By |2021-04-21T15:29:18-07:00January 1st, 2018|Efficiency/Growth, Financial Regulation, Political Economy, Reference|