Do Non-Banks Need Access to the Lender of Last Resort? Evidence from Mutual Fund Runs

Abstract

When a liquidity crisis hits non-bank financial intermediaries, which central bank interventions help? We show that investment funds faced large investor outflows as the COVID-19 shock hit and assess the effectiveness of central bank asset purchases and additional liquidity provision to banks in alleviating the crisis. We use detailed fund-level data and proprietary data on bank take-ups in liquidity-providing operations and bank-fund repo transactions. Analyzing asset purchases, we find that funds with higher shares of assets eligible for central bank purchases in their portfolio before the COVID-19 crisis saw their performance improve by 3.7% and outflows decrease by 63% relative to otherwise similar funds. Analyzing repo activity, we find that additional central bank liquidity provision supported bank repo lending to funds, by alleviating bank liquidity constraints. Banks more exposed to the March 2020 liquidity crisis that took up central bank liquidity increased their repo transactions with funds by 3% to 4% compared to other banks. Our results suggest that central bank interventions were effective in stopping fire-sale dynamics and staving off runs on non-bank financial intermediaries, even though funds did not have direct access to the lender of last resort.