APPLIED MICRO: Bank-Affiliated Mutual Funds’ Lenders of Last Resort; Professor Emanuele Tarantino (Luiss University)

Abstract

We provide evidence consistent with bank-affiliated mutual funds rescuing firms in difficulty, by providing liquidity in situations of financial distress. We document that firms with multilateral banking relationships are disproportionately more likely to strategically default with banks that have no affiliated mutual funds. Subsequently, they issue corporate bonds that are sold to the mutual funds of their integrated banks at a price that reflects their risk. As a result, the issuing firms reduce the stock of non-performing loans they have with the banking system. We find no evidence of reduced performance for the mutual funds involved in the rescue of the distressed firm.