Finance and Economics Discussion Series (FEDS)
Securities Lending as Wholesale Funding: Evidence from the U.S. Life Insurance Industry
The existing literature implicitly or explicitly assumes that securities lenders primarily respond to demand from borrowers and reinvest their cash collateral through short-term markets. Using a new dataset that matches every U.S. life insurer's bond portfolio, as well as their lending and reinvestment decisions, to the universe of securities lending transactions, we offer compelling evidence for an alternative strategy, in which securities lending programs are used to finance a portfolio of long-dated assets. We discuss how the liquidity and maturity mismatch associated with using securities lending as a source of wholesale funding could potentially impair the functioning of the securities market.
Keywords: Life insurers, market liquidity, securities lending, wholesale funding
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