Page 312 - Special Topic Session (STS) - Volume 1

STS441 Giulio B. et al.
pronounced for public fund, in contrast to specialized funds that cater other
financial institutions and are presumably more closely monitored.
Interestingly, these results are robust if we also control for the fact that banks
might sell particularly illiquid bonds (as proxied by the bid-ask spreads
obtained from Bloomberg) to their customers and mutual funds to mitigate
market impact. However, we do not find that a bank’s sales of risky and illiquid
sovereign bonds are more correlated with the bank customers’ and funds’
purchases than for liquid risky bonds. As regards bank characteristics,
especially banks that experience a severe drop in their equity ratio (and
presumably therefore have to deleverage fast and on a larger scale) tend to
sell risky sovereign bonds to their customers.
In a second step, we compare the portfolio dynamics of funds that are
affiliated to a bank with changes in the security holdings of independent
mutual funds. Controlling for time-varying security and fund fixed effects, we
find that bank-affiliated mutual funds increased their risky sovereign bond
holdings significantly more than their unaffiliated peers. Similarly, when a fund
has a parent bank and the parent bank reduced its holdings of a risk sovereign
bond, we see that the affiliated fund purchases more of the respective risky
bond than its peers, again taking time-varying fund and security fixed effects
into account. Overall, we find that from the beginning of the sovereign debt
crisis to its peak the portfolio share of risky sovereign bonds increased more
at bank-affiliated mutual funds compared to the unaffiliated peers. This
difference is the more pronounced the riskier the sovereign bond. These
findings suggest that affiliated funds did not or could not offset the acquisition
of risky bonds from their parent bank by reducing relatively their portfolio
holdings of other risky sovereign bonds.
We next turn to the impact of a bank’s fire sales of risky sovereign bonds
to affiliated funds on the performance of those bank-affiliated funds. When we
compare the raw returns of funds, we find that a fund’s short-term
performance is significantly lower if it has a parent bank and seemingly
acquired more risky bonds from its parent bank. This holds even if we include
time and fund fixed effects and control for a fund’s overall risky bond holdings
and acquisitions. This suggests that bank-affiliated funds provided price
support when purchasing risky sovereign bonds sold off by their parent bank.
In turn this compressed the liquidity premium those funds obtained compared
to other funds that purchased risk bonds at fire sale prices in the market.
Finally, we study whether having a mutual fund also allowed banks to
reduce their portfolio share of risky sovereign bonds during the sovereign
debt crisis. When regressing for each bank the changes in the portfolio share
of the different bonds, we find that banks with an affiliated fund were able to
reduce their holdings of risky sovereign bonds significantly more than banks
without an asset management company. This effect is robust to the inclusion

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