Abstract
In this paper, I study how rollover funding risk affects banks’ asset illiquidity choice. I address this question using the 2016 US money market fund reform, which reduced the availability of unstable MMF funding and imposed regulations that mitigated the incentives of MMF investors to run. Using this regulatory shock and a sample of MMF-borrowing international banks, I find that a reduction in rollover risk following MMF reform leads to an increase in the fraction of lending on bank balance sheets. I supplement this analysis with detailed corporate loan-level data and find that the increase in lending is concentrated in the most illiquid loan categories. This evidence supports the theory that unstable funding discourages investment in illiquid assets by exposing banks to fire-sale risk.
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