Page 316 - Special Topic Session (STS) - Volume 1

STS441 Giulio B. et al.
3. Conclusion
In this paper, we provide evidence suggesting that banks used both their
affiliated mutual funds and their retail customers as an exit channel to sell off
risky sovereign bonds. Some evidence indicates that banks did so to mitigate
market impact: they seem to have particularly sold bonds with a relatively large
bid-ask spread to their funds. But at the same time banks presumably pushed
liquid risky bonds to their affiliated funds and retail customers. Admittedly, our
test on whether banks used funds and customers as exit channel to mitigate
market impact suffers from the fact that our proxy for market liquidity – the
bid-ask spread – is not the best measure for market impact.
Our further analysis shows that bank- affiliated mutual funds not only
increased their holdings of those bonds that their parent bank sold, they also
increased their overall portfolio share of risky sovereign bonds during the
euro-area sovereign debt crisis significantly more than their un affiliated peers.
This suggests that those funds ended up being riskier than funds without a
parent bank. At the same time banks with affiliated mutual funds were able to
reduce their holdings of risky and illiquid sovereign bonds more significantly
during the sovereign debt crisis than comparable banks without an affiliated
asset management company.
Although evidence indicates that funds did not underperform in the long
term after piling up sovereign risk, this seemingly opportunistic behavior of
banks might in general undermine the efficiency of their clients’ investment
decisions. On the other hand, it presumably helped banks to offload risky
sovereign holdings with only limited market impact. As a consequence, this
exit channel might have also helped to mitigate fire-sale pricing and thus fire-
sale externalities.

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