Global banks, dollar funding, and regulation

Abstract

We document significant and persistent price dislocations in secured and unsecured wholesale dollar funding markets between US money market funds (MMFs) and highly-rated global banks. We show that bargaining frictions affect prices in these key short-term dollar funding markets. Our identification strategy relies on a number of quasi-experiments, including the US MMF reform and quarter-end window-dressing by European banks. Post-crisis regulations have reduced competition in these markets and have generated incentives for regulatory arbitrage, which affect bargaining power and prices. Our results also highlight substantial heterogeneity across global banks of different nationalities in their behavior in dollar funding markets.