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Sources of Funding in a Crisis: Evidence from Investment Banks

Author

Listed:
  • Jean Helwege

    (University of California, Riverside, CA 92508, USA)

  • Jan Jindra

    (U.S. Securities and Exchange Commission, 44 Montgomery Street 2800, San Francisco, CA 94104, USA)

Abstract

In this paper, we evaluate changes in investment bank balance sheets to determine how these firms respond to shocks in a financial crisis. Contrary to theories that emphasize liquidity problems, we find that most investment banks maintain funding levels during these downturns. Investment banks typically respond to shocks with a shift into deposits or by raising equity, rather than selling assets at a loss. We do not find strong evidence of fire sales, as asset declines mainly reflect write-downs rather than sales at unusually low prices. Write-downs are combined with strategic use of Level 3 assets, suggesting that banks mask insolvency. Investment banks often rely on cherry picking of assets in order to boost reported capital in a downturn.

Suggested Citation

  • Jean Helwege & Jan Jindra, 2023. "Sources of Funding in a Crisis: Evidence from Investment Banks," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 13(03), pages 1-44, September.
    • Handle: RePEc:wsi:qjfxxx:v:13:y:2023:i:03:n:s2010139223500088
    DOI: 10.1142/S2010139223500088
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    More about this item

    Keywords

    Investment banks; Level 3 assets; funding shocks; credit risk; liquidity shocks; fire sales; financial crisis;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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