Liquidity Support in Financial Institutions
54 Pages Posted: 29 Jul 2020 Last revised: 18 May 2021
Date Written: July 13, 2020
We document a novel support mechanism by banks through coordinating the investments of their clients in their affiliated mutual funds that experience excessive withdrawals. New inflows from bank clients limit the adverse effects of financial distress on fund performance and further mitigate strategic complementarities in investor redemption decisions. Thus, banks serve as a coordination device for the investments of their clients and enable them to earn a premium from participating in this support mechanism. Overall, our results demonstrate the existence of a mutual support system within financial institutions and highlight the potential benefits of bank-affiliation for fund investors.
Keywords: Bank-Affiliated Mutual Funds, Internal Capital Markets, Liquidity Provision, Financial Fragility, Fund Flows
JEL Classification: G21, G23
Suggested Citation: Suggested Citation