Conference Agenda

We demonstrate how private equity (PE) sponsorship stimulates non-bank participation in the syndicated loan market. Relative to non PE-backed loans, PE-backed loans exhibit lower bank monitoring, lower loan shares retained by lead banks, and larger loan shares held by non-banks. These effects are stronger when the PE sponsor has a high reputation or expertise in the borrower's industry. Further, sponsor reputation and industry expertise are associated with improved loan performance. Our findings suggest that PE sponsors' engagement with borrowers substitutes for banks' monitoring and information production, allowing banks to retain less skin-in-the-game in the loans they originate.

We study how financial intermediaries obtain US dollars from wholesale and synthetic funding markets, uncovering three key findings. First, non-US banks substitute funding from US repurchase agreements (repo) with FX swaps at quarter-ends. Second, this behavior arises from regulatory shadow costs which affect repos but not synthetic funding. Third, non-US institutions’ inelastic demand for dollars drives up the cross-currency basis, with Eurozone banks primarily engaging in this substitution. US dealers benefit, while costs are passed to end customers. Our study highlights how unintended regulatory effects impact interconnected money markets, driving quarter-end surges in synthetic dollar borrowing and no-arbitrage violations.

Instant payment systems have received considerable attention because of their integration with the banking system and their shared functionalities with CBDCs. We show that instant payments may have the unintended consequences of increasing the banking sector’s demand for liquidity and risk-taking incentives. Using administrative banking data and transaction-level payment data from Brazil’s Pix, one of the most widely adopted instant payment systems, we find that banks increased their liquid asset holdings and lent out more subprime and defaulting loans after the adoption of instant payments. We establish the causal relationship by constructing a novel instrument based on passive payment timeouts. These findings arise because the convenience of instant payments to consumers comes at the expense of banks’ ability to delay and net payment flows. The inability to delay payments increases banks’ demand for holding liquid assets over transforming illiquid ones. Banks’ increased holding of liquid and safe assets in turn exacerbates their risk-taking incentives in choosing illiquid assets. Our findings bear important financial stability implications in light of the global surge in adopting instant payment systems, e.g., FedNow in the US.