NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Securities Lending as Wholesale Funding: Evidence from the U.S. Life Insurance Industry

Nathan Foley-Fisher, Borghan Narajabad, Stephane Verani

NBER Working Paper No. 22774
Issued in October 2016
NBER Program(s):Asset Pricing, Corporate Finance

The existing literature assumes that securities lenders primarily respond to demand from securities borrowers and reinvest their cash collateral in short-term markets. We offer compelling evidence for a supply channel, using new data matching U.S. life insurers' individual bond lending and reinvestment decisions to the universe of securities lending transactions. We show that an insurer's decision to lend a bond is positively correlated with liquidity transformation in its lending program, even after controlling for demand for that bond. We discuss how using securities lending cash collateral as a source of wholesale funding might impair securities markets in times of stress.

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Document Object Identifier (DOI): 10.3386/w22774

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