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Journal of Financial Services Research

25-11-2024

Bank-Level Political Risk and the CD Rates Required by Money Market Funds

Authors: Kyle D Allen, Ahmed S Baig, Pritam Saha

Published in: Journal of Financial Services Research

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Abstract

We use the bank-level measure of political risk from Hassan et al. (2019), which is based on textual analysis of conference calls, to investigate whether banks’ exposure to political risk is associated with an increase in their rates for certificates of deposit (CDs) when borrowing from money market funds (MMFs). Our findings show that this risk exposure is associated with an increase in the short-term borrowing costs for banks. These results are robust to a range of univariate and multivariate regression specifications, fixed effects, and propensity score matching.

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Available only for authorised users

This measure is publicly available at www.firmlevelrisk.com.

Our baseline result is based on a commercial bank sample with bank fixed effects. However, for additional analysis in some tables, we included a larger sample with some additional banking institutions using bank type fixed effects.

See the appendix for definitions of the variables.

Jacewitz et al. (2022) show that bank-sponsored and non-bank-sponsored MMFs have different characteristics. We examine whether political risk is priced differently for these two types of MMFs. In unreported tests, we split the sample into bank-sponsored vs. non-bank-sponsored MMFs and re-ran the analysis from Table 3. Our findings suggest that the relationship between political risk and spreads is more robust for bank-sponsored MMFs.

We divide our sample into four periods based on the passage and implementation of the regulations. September 2013 through June 2014 is the pre-announcement period; July 2014 through October 2015 is the announcement period; November 2015 through October 2016 is the shadow period; and the remaining dates are within the period when the regulations were in effect.

See the FDIC Regulations: chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.fdic.gov/regulations/safety/manual/section2-1.pdf.

Examples using CAR: See Acharya and Steffen (2020) and Gropp et al. (2019).

We obtain similar results are similar if we split the sample by medians or quartiles of Tier 1 CAR.

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Title: Bank-Level Political Risk and the CD Rates Required by Money Market Funds
Authors: Kyle D Allen
Ahmed S Baig
Pritam Saha
Publication date: 25-11-2024
Publisher: Springer US
Published in: Journal of Financial Services Research
Print ISSN: 0920-8550
Electronic ISSN: 1573-0735
DOI: https://doi.org/10.1007/s10693-024-00438-6