Reciprocity in Shadow Bank Lending: Evidence from the Cross-Holding Relation in Money Market Funds

Abstract

This paper documents a reciprocal cross-holding relation (CHR) between financial conglomerates: banks mutually hold each other's money market instruments through their affiliated money market funds (MMFs). Using novel MMF holdings data, this study shows that U.S. banks increased their MMFs' portfolio weights on bilateral-connected European financial firms after Moody's review of European banks in mid-2011---a unique period in which MMFs generally reduced their exposure to European issuers to avoid further redemptions. I provide evidence that this bias represents reciprocity between the bilaterally connected financial firms. In return, during the same period, European financial firms held larger shares of risky securities issued by their bilaterally connected U.S. partners through their affiliated MMFs. Issuer- or fund-characteristics do not fully explain the results.