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STS441 Giulio B. et al.
The fire-sale channels of universal banks in the
European sovereign debt crisis
†
Giulio Bagattini*, Falko Fecht*, and Patrick Webery
*Frankfurt School of Finance and Management
† Deutsche Bundesbank, DG Statistics
Abstract
We use a unique security-level data set to analyze correlations in bond trading
of banks, their respective retail customers and their affiliated mutual funds.
Matching banks’ proprietary holdings with the holdings of their funds and
their retail customers for the period 2009-2016 at the security level, we find
evidence that banks sold off risky euro-area sovereign bonds to both their
retail customers and their affiliated mutual funds (particularly their public
funds) during the European sovereign debt crisis. Overall, this enabled banks
with affiliated mutual funds to sell off larger amounts of their risky sovereign
bond holdings, while bank-affiliated mutual funds acquired more risky
sovereign bonds compared to their unaffiliated peers. The larger the risky
sovereign bond position a fund acquired from its parent bank, the lower are
the fund’s short-term raw returns controlling for the risky bonds the fund
overall acquired. Our findings show that banks use their customers portfolio
and their affiliated funds as liquidity provider when they sell off their risk
bonds without paying the funds the ad-equate liquidity premium. On the one
hand, this points to a severe conflict of interest between banks’ own account
trading and their asset and wealth management services. On the other hand,
it highlights that the severity of fire-sale contagion depends on the
organizational structure of the financial sector.
We would like to thank Tarun Ramadorai, Linda Goldberg, Dragon Tang, Jens Christensen,
Milos Bozovic, Corinna Woyand and Christian Buschmann (discussants), conference participants
at the 11th LSE Annual Paul Woolley Centre Conference, the 18th Annual FDIC Bank Research
Conference, the FSB-CBoI Research Workshop on Non-bank Financial Intermediation, the 14th
Annual Central Bank Conference on the Microstructure of Financial Markets, the EFA 2018, the
EEA 2018, the 21st Annual Conference of the Swiss Society for Financial Market Research, the
Belgrade Young Economists Conference, the Universität Augsburg-Deutsche Bundesbank-
Universität Wien 7th Workshop Banks & Financial Markets, and seminar participants at the
Deutsche Bundesbank, the University of St. Gallen, the European Central Bank, the Banque de
France, the University College Dublin, University of Hohenheim, the Central Bank of Ireland, and
Frankfurt School of Finance & Management for helpful comments and suggestions. We would
also like to thank Gabriele Meinert, Christoph Fricke and the Division Securities and Money
Market Statistics. The paper represents the authors’ personal opinions and does not necessarily
reflect the views of the Deutsche Bundesbank or the Eurosystem.
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