Securities Lending as Wholesale Funding: Evidence from the U.S. Life Insurance Industry

Foley-Fisher, Nathan; Narajabad, Borghan; Verani, Stéphane

doi:10.3386/w22774

Cited by 18 publications

(2 citation statements)

References 28 publications

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“…We also assume that the supply from securities lenders depends on η, which governs their willingness to provide securities lending services. In effect, Foley-Fisher et al (2015) show that securities lending programs use funds from their activities to finance long dated assets, making their lending services depend on factors beyond repo specialness. We capture these incentives in reduced form through η, and assume ∂SL ∂η > 0.…”

Section: Securities Lendersmentioning

confidence: 99%

Bond market intermediation and the Role of Repo

Huh

Infante

2021

Journal of Banking & Finance

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This paper models the important role that repurchase agreements (repos) play in bond market intermediation. Not only do repos allow dealers to finance their activities, but they also increase dealers' ability to satisfy levered client demands without having to adjust their holdings of risky assets. In effect, the ability to borrow specific assets for delivery allows dealers to source large quantity of assets without taking ownership of them. Larger levered client orders imply larger asset borrowing demands, thus increasing the borrowing cost for the asset (i.e., repo * This paper was previously circulated under the title "Bond Market Liquidity and the Role of Repo." We thank Erik Heitfield, Jean-David Sigaux, and participants at the 12th Annual Central Bank Conference on Market Microstructure of Financial Markets for their helpful feedback. The views of this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System. Federal Reserve Board, 20th St. and Constitution

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Section: Securities Lendersmentioning

confidence: 99%

Bond market intermediation and the Role of Repo

Huh

Infante

2021

Journal of Banking & Finance

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“…Interestingly, in our sample the profits from trading in securities and the profits from 7 The risk shifting hypothesis has also been investigated in other sectors of the financial industry. While substantial agreement exists in favour of the risk shifting hypothesis in the mutual fund industry (see, for instance, Huang, Clemens, and Hanjiang (2011) and literature cited within), results are mixed in the insurance sector (Becker and Ivashina, 2015;Foley-Fisher, Narajabad, and Verani, 2016;Kirti, 2017). 8 Also Horvath, Huizinga and Ioannidou (2015) using similar data suggest that the risk shifting motive is a driver of the investment in domestic government bonds but they do not base their analysis on measures of bank balance sheet fragility.…”

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confidence: 99%

Risk Mitigating versus Risk Shifting: Evidence from Banks Security Trading in Crises

2020

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We show that risk mitigating incentives dominate risk shifting incentives in fragile banks. Risk shifting could be particularly severe in banking since it is the most opaque industry and banks are one of the most leveraged corporations with very low skin in the game. To analyze this question, we exploit security trading by banks during financial crises, as banks can easily and quickly change their risk exposure within their security portfolio. However, in contrast with the risk shifting hypothesis, we find that less capitalized banks take relatively less risk after financial market stress shocks. We show this using the supervisory ISIN-bank-month level dataset from Italy with all securities for each bank. Our results are over and above capital regulation as we show lower reach-for-yield effects by less capitalized banks within government bonds (with zero risk weights) or within securities with the same rating and maturity in the same month (which determines regulatory capital). Effects are robust to controlling for the covariance with the existence portfolio, and less capitalized banks, if anything, reduce concentration risk. Further, effects are stronger when uncertainty is higher, despite that risk shifting motives may be then higher. Moreover, three separate testsbased on different accounting portfolios (trading book versus held to maturity), the distribution of capital and franchise valuesuggest that bank own incentives, instead of supervision, are the main drivers. Results are confirmed if we consider other sources of balance sheet fragility and different measures of risk-taking. Finally, evidence from the recent COVID-19 shock corroborates findings from the Global Financial Crisis and the Euro Area Sovereign Crisis.

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What’s Wrong with Annuity Markets?

Verani,

2024

Journal of the European Economic Association

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We show that the supply of U.S. life annuities is constrained by interest rate risk. We identify this effect using annuity prices offered by life insurers from 1989 to 2019 and exogenous variations in contract-level regulatory capital requirements. The cost of interest rate risk management—conditional on the effect of adverse selection—accounts for about half of annuity markups, or 8 percentage points. The contribution of interest rate risk to annuity markups sharply increased after the Global Financial Crisis, suggesting new retirees’ opportunities to transfer their longevity risk are unlikely to improve in a persistently low interest rate environment.

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Securities Lending as Wholesale Funding: Evidence from the U.S. Life Insurance Industry

Cited by 18 publications

References 28 publications

Bond market intermediation and the Role of Repo

Bond market intermediation and the Role of Repo

Risk Mitigating versus Risk Shifting: Evidence from Banks Security Trading in Crises

What’s Wrong with Annuity Markets?

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