Stephane Verani

From Wall Street to Main Street: The Impact of the Financial Crisis on Consumer Credit Supply

This paper studies how the collapse of the asset backed securities (ABS) market during the financial crisis of 2007-2009 affected the supply of credit to the broader economy using a new dataset that describes unique interbank relationships within the credit union industry. This industry is important for consumer finance, and we find that ABS related losses at correspondent credit unions are associated with a large contraction in the supply of consumer credit and a hoarding of cash among downstream credit unions. We also find that this contraction in credit supply was concentrated among downstream credit unions that began the crisis with lower capital asset ratios, and that it may have amplified the initial decline in house prices. These results suggest that capital regulation might shape the ability of financial institutions to transmit securities price volatility onto the real economy.

Self-Fulfilling Runs: Evidence from the U.S. Life Insurance Industry

The interaction of worsening fundamentals and strategic complementarities among investors renders identification of self-fulfilling runs challenging. We propose a dynamic model to show how exogenous variation in firms’ liability structures can be exploited to obtain variation in the strength of strategic complementarities. Applying this identification strategy to puttable securities offered by U.S. life insurers, we find that 40 percent of the

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

18 billion run on life insurers by institutional investors during the summer of 2007 was due to self-fulfilling expectations. Our findings suggest that other contemporaneous runs in shadow banking by institutional investors may have had a self-fulfilling component.

Funding Agreement-Backed Securities in the Enhanced Financial Accounts

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.

Over-the-Counter Market Liquidity and Securities Lending

This note describes new data on funding agreement-backed securities (FABS) that is being provided as part of the Enhanced Financial Accounts (EFA) initiative.

Financing constraints, firm dynamics, and international trade

This paper studies how over-the-counter (OTC) market liquidity was adversely affected by the collapse of securities lending during the 2007-2008 financial crisis. We combine micro-data on corporate bond OTC market trades with securities lending transactions, in which life insurance companies are major counterparties. We exploit cross-sectional differences in the corporate bonds that are held and lent by life insurance companies to estimate the causal effect of securities lending on corporate bond market liquidity. We show that the collapse of AIGs securities lending programs in 2008 caused a substantial and long-lasting reduction in the market liquidity of the corporate bonds that were predominantly held by AIG, even after controlling for the interaction between funding liquidity and market liquidity. We find that some of the increase in the illiquidity of bonds held predominantly by AIG can be attributed to a sharp increase in relatively small trades among a greater number of dealers.