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

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Abstract
The existing literature implicitly or explicitly assumes that securities lenders primarily respond to demand from borrowers and reinvest their cash collateral through short-term markets. Using a new dataset that matches every U.S. life insurer?s bond portfolio, as well as their lending and reinvestment decisions, to the universe of securities lending transactions, we offer compelling evidence for an alternative strategy, in which securities lending programs are used to finance a portfolio of long-dated assets. We discuss how the liquidity and maturity mismatch associated with using securities lending as a source of wholesale funding could potentially impair the functioning of the securities market.

Suggested Citation

  • Nathan Foley-Fisher & Borghan N. Narajabad & Stéphane Verani, 2016. "Securities Lending as Wholesale Funding : Evidence from the U.S. Life Insurance Industry," Finance and Economics Discussion Series 2016-050, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2016-50
    DOI: 10.17016/FEDS.2016.050
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    as
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    9. Nathan Foley-Fisher & Borghan Narajabad & Stéphane Verani, 2020. "Self-Fulfilling Runs: Evidence from the US Life Insurance Industry," Journal of Political Economy, University of Chicago Press, vol. 128(9), pages 3520-3569.
    10. Daniel Covitz & Nellie Liang & Gustavo A. Suarez, 2013. "The Evolution of a Financial Crisis: Collapse of the Asset-Backed Commercial Paper Market," Journal of Finance, American Finance Association, vol. 68(3), pages 815-848, June.
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    12. Reena Aggarwal & Pedro A. C. Saffi & Jason Sturgess, 2015. "The Role of Institutional Investors in Voting: Evidence from the Securities Lending Market: Erratum," Journal of Finance, American Finance Association, vol. 70(6), pages 2901-2902, December.
    13. Reena Aggarwal & Pedro A. C. Saffi & Jason Sturgess, 2015. "The Role of Institutional Investors in Voting: Evidence from the Securities Lending Market," Journal of Finance, American Finance Association, vol. 70(5), pages 2309-2346, October.
    14. Frank M. Keane, 2013. "Securities loans collateralized by cash: reinvestment risk, run risk, and incentive issues," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 19(May).
    15. Steven N. Kaplan & Tobias J. Moskowitz & Berk A. Sensoy, 2013. "The Effects of Stock Lending on Security Prices: An Experiment," Journal of Finance, American Finance Association, vol. 68(5), pages 1891-1936, October.
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    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. A Primer on Securities Lending
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2016-11-07 19:49:47

    Citations

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    Cited by:

    1. Cimon, David & Garriott, Corey, 2019. "Banking regulation and market making," Journal of Banking & Finance, Elsevier, vol. 109(C).
    2. Nathan Foley-Fisher & Borghan Narajabad & Stéphane Verani, 2020. "Self-Fulfilling Runs: Evidence from the US Life Insurance Industry," Journal of Political Economy, University of Chicago Press, vol. 128(9), pages 3520-3569.
    3. Stéphane Verani & Pei Cheng Yu, 2024. "What’s Wrong with Annuity Markets?," Journal of the European Economic Association, European Economic Association, vol. 22(4), pages 1981-2024.
    4. Berdin, Elia & Gründl, Helmut & Kubitza, Christian, 2017. "Rising interest rates, lapse risk, and the stability of life insurers," ICIR Working Paper Series 29/17, Goethe University Frankfurt, International Center for Insurance Regulation (ICIR).
    5. Peydró, José-Luis & Polo, Andrea & Sette, Enrico, 2020. "Risk Mitigating versus Risk Shifting: Evidence from Banks Security Trading in Crises," CEPR Discussion Papers 15473, C.E.P.R. Discussion Papers.
    6. Massa, Massimo & Manconi, Alberto & Kempf, Elisabeth, 2017. "Canary in a Coalmine: Securities Lending Predicting the Performance of Securitized Bonds," CEPR Discussion Papers 11993, C.E.P.R. Discussion Papers.
    7. Coen, Jamie & Coen, Patrick & Hüser, Anne-Caroline, 2024. "Collateral demand in wholesale funding markets," Bank of England working papers 1082, Bank of England.
    8. Kirti, Divya, 2024. "When gambling for resurrection is too risky," Journal of Banking & Finance, Elsevier, vol. 162(C).
    9. Nathan Foley-Fisher & Stefan Gissler & Stephane Verani, 2019. "Over-the-Counter Market Liquidity and Securities Lending," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 272-294, July.
    10. Sirio Aramonte & Andreas Schrimpf & Hyun Song Shin, 2023. "Non-bank financial intermediaries and financial stability," Chapters, in: Refet S. Gürkaynak & Jonathan H. Wright (ed.), Research Handbook of Financial Markets, chapter 7, pages 147-170, Edward Elgar Publishing.
    11. Yesol Huh & Sebastian Infante, 2017. "Bond Market Intermediation and the Role of Repo," Finance and Economics Discussion Series 2017-003, Board of Governors of the Federal Reserve System (U.S.).
    12. Nicholas Garvin & David W Hughes & José-Luis Peydró, 2021. "The Role of Collateral in Borrowing," RBA Research Discussion Papers rdp2021-01, Reserve Bank of Australia.

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    More about this item

    Keywords

    Securities lending; Wholesale funding; Life insurers; Market liquidity;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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