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We study whether the stability of mutual funds and the propensity of a run among investors depend on the ownership structure. Flows of funds run by banks or by firms that belong to the same financial group as a bank are less volatile and less sensitive to bad past performance. This enables bank-affiliated funds to better weather distress and to hold lower precautionary cash buffers in comparison with their unaffiliated peers. Banks provide liquidity support to distressed affiliated funds increasing their stakes in funds that are experiencing large outflows. We find that liquidity support and other benefits of bank affiliation are stronger if the parent bank is more liquid and better capitalised. Analyzing the aftermath of two exogenous shocks to financial markets -- the Brexit referendum and political uncertainty in Italy -- we show that distress in the banking system spills over to the mutual fund sector via ownership links.

We analyze how the Lehman and sovereign crises affect cross-border interbank liquidity, exploiting euro-area proprietary interbank data, crisis and monetary shocks, and loan terms to the same borrower during the same day by domestic versus foreign lenders. Crisis shocks reduce the supply of cross-border liquidity, with stronger volume than pricing effects. On the extensive margin, results suggest that the cross-border credit crunch is independent of borrower quality, while—on the intensive margin—riskier borrower banks suffer more. Moreover, the cross-border liquidity crunch is substantially stronger for term loans, and weaker for foreign lender banks that have a subsidiary in the same country than the borrower. Finally, nonstandard monetary policy improves interbank liquidity, but without fostering strong re-integration of cross-border interbank markets. José-Luis Peydró acknowledges financial support from project ECO2015-68182-P (MINECO/FEDER, UE) and the European Research Council Grant (project 648398).

We document a novel support mechanism by banks through coordinating the investments of their clients in their affiliated mutual funds that experience excessive withdrawals. New inflows from bank clients limit the adverse effects of financial distress on fund performance and further mitigate strategic complementarities in investor redemption decisions. Thus, banks serve as a coordination device for the investments of their clients and enable them to earn a premium from participating in this support mechanism. Overall, our results demonstrate the existence of a mutual support system within financial institutions and highlight the potential benefits of bank-affiliation for fund investors.

We use a unique data set that comprises each Euro area bank’s daily recourse to the ECB’s marginal lending facility (MLF) and all its bids placed in the ECB’s main refinancing operations (MROs) that were conducted as variable rate tenders until October 2008. We show that the more aggressive a bank bids in a MRO, the higher is its propensity to subsequently draw on the MLF. Our results indicate that particularly with the beginning of the financial crisis, the interest rate paid by a bank in a variable rate tender auction strongly reflects its private value for liquidity, i.e. its opportunity costs of obtaining short-term funding in money markets, and thus, the risk premium it is charged in the private market. This suggests 1) that variable rate tender auctions preserve some market discipline and contain moral hazard issues, especially in times when a central bank is extending its liquidity provision and 2) that the average interest rate paid in an auction can be a useful indicator for bank supervisors to gauge a bank’s access to liquidity in money markets.

Most central banks offer banks participating in large‐value real‐time gross settlement (RTGS) systems a free intraday overdraft facility to discourage banks from actively managing their daylight liquidity. In this paper, we ask whether this facility has kept the intraday interest rate at zero. Using a unique transaction‐level data set on collateralized interbank loans for 2006–12, we find that during periods of financial distress, rates for morning transactions are higher than those in the afternoon. Moreover, this intraday rate correlates with market liquidity, suggesting that rates contain a liquidity premium. This intraday pattern is reduced, but not eliminated by the Eurosystem's accommodative liquidity provision.

We use a unique security-level data set to analyze correlations in bond trading of banks, their respective retail customers and their affiliated mutual funds. Matching banks' proprietary holdings with the holdings of their funds and their retail customers for the period 2009-2016 at the security level, we find evidence that banks sold off risky euro-area sovereign bonds to both their retail customers and their affiliated mutual funds (particularly their public funds) during the European sovereign debt crisis. Overall, this enabled banks with affiliated mutual funds to sell off larger amounts of their risky sovereign bond holdings, while bank-affiliated mutual funds acquired more risky sovereign bonds compared to their unaffiliated peers. The larger the risky sovereign bond position a fund acquired from its parent bank, the lower are the fund's short-term raw returns controlling for the risky bonds the fund overall acquired. Our findings show that banks use their customers portfolio and their affiliated funds as liquidity provider when they sell off their risk bonds without paying the funds the adequate liquidity premium. On the one hand, this points to a severe conflict of interest between banks' own account trading and their asset and wealth management services. On the other hand, it highlights that the severity of fire-sale contagion depends on the organizational structure of the financial sector.

[EN] Recent regulatory initiatives such as the European Deposit Insurance Scheme propose a change in the coverage and backing of deposit insurances. An assessment of these proposals requires a thorough understanding of what drives depositors' withdrawal decisions. We show that Google searches for 'deposit insurance' and related strings reflect depositors' fears and help to predict deposit shifts in the German banking sector from private banks to fully guaranteed public banks. After the introduction of blanket state guarantees for all deposits in the German banking system this fear driven reallocation of deposits stopped. Our findings highlight that a heterogeneous insurance of deposits can lead to a sudden, fear induced reallocation of deposits endangering the stability of the banking sector even in absence of redenomination risks.

This article shows how the recent money market disruptions with elevated counterparty risks and uncertainty about the fundamental value of liquidity influenced the trading behaviour of a key dealer in the Euro money market. The complete trading record in the unsecured segment of the money market for 2007 and 2008 is used to estimate a stylized pricing model, which explicitly accounts for the over-the-counter structure. The empirical results suggest that the market maker learns from order flow, but this information aggregation was increasingly hampered as the crisis unfolded.

In this paper, we focus on the interconnectedness of banks and the price they pay for liquidity. We assess how the concentration of credit relationships and the position of a bank in the network topology of the system influence the bank’s ability to meet its liquidity demand. We use quarterly data of bilateral interbank credit exposures between all German banks from 2000 to 2008 to measure interbank relationships and the network characteristics. We match these data with the bids placed by the individual banks in the European Central Bank’s (ECB) weekly repo auctions. The bids measure each bank’s willingness to pay for liquidity since they had variable rate tenders with a “pay-your-bid” price. Controlling for bank characteristics and the daily fulfillment of reserve requirements, we find that banks with a more diversified borrowing structure in the interbank market bid significantly less aggressively and pay a lower price for liquidity in the ECB’s main refinancing operations. These findings suggest that incentives to diversify bank liquidity risk dominate the benefits of private information. When the network position of the bank is taken into account, we find that central lenders in the money market bid more aggressively in the auctions.

In a framework closely related to Diamond and Rajan (J Polit Econ 109:287–327, 2011) we characterize different financial systems and analyze the welfare implications of different central bank policies in these financial systems. We show that in case of a large negative liquidity shock, liquidity demand has lower interest rate elasticity in a bank-based financial system than in a market oriented financial system. Market interventions, i.e. non-standard monetary policy measures to inject liquidity need to be much larger in a bank-based financial system in order to bring down interest rates to sustainable levels. Therefore, in financial systems with rather illiquid assets an individual liquidity assistance might be welfare improving, while in market oriented financial systems, with rather liquid assets in the banks’ balance sheets, liquidity assistance provided freely to the market at a penalty rate is likely to be efficient. While the costs of individual support might not be worthwhile in a market oriented financial system in which deadweight losses of market based support are small, in a bank based system the deadweight losses of unconventional monetary policy are large and thus individual support more efficient.

Central banks are under increased scrutiny because of the rapid growth in, and composition of, their balance sheets. Therefore, understanding the processes that shape these balance sheets and their consequences is crucial. We contribute by studying an extensive dataset of banks’ liquidity uptake and pledged collateral in central bank repos. We document systemic arbitrage whereby banks funnel credit risk and low-quality collateral to the central bank. Weaker banks use lower quality collateral to demand disproportionately larger amounts of central bank money (liquidity). This holds both before and after the financial crisis and may contribute to financial fragility and fragmentation.

This paper studies the implications of cross-border financial integration for financial stability when banks' loan portfolios adjust endogenously. Banks can be subject to sectoral and aggregate domestic shocks. After integration they can share these risks in a complete interbank market. When banks have a comparative advantage in providing credit to certain industries, financial integration may induce banks to specialize in lending. An enhanced concentration in lending does not necessarily increase risk, because a well-functioning interbank market allows to achieve the necessary diversification. This greater need for risk sharing, though, increases the risk of cross-border contagion and the likelihood of widespread banking crises. However, even though integration increases the risk of contagion it improves welfare if it permits banks to realize specialization benefits.

Financial innovation and greater information availability have increased the tradability of bank assets and have reduced banks’ dependence on individual bank managers. We show that this can have two opposing consequences for banking stability. First, the hold-up problem between bank managers and shareholders becomes less severe. Consequently, banks’ capital structure needs to be less concerned with disciplining the management. Deposits – the most effective disciplining device – can be reduced, increasing banks’ resilience to adverse return shocks. However, limiting the hold-up problem also diminishes bank managers’ rents, reducing their incentives to properly monitor and screen borrowers, with adverse implications for asset quality. Thus, the default risk of banks does not necessarily decline. We argue that this delivers a novel explanation for the origin of the recent subprime crisis.

We document a general pattern in the euro area overnight interbank rate (EONIA) and analyze how German banks compared to other EMU banks respond to these predictable changes in the price for reserve holdings. At the beginning of the maintenance period, when the EONIA is typically above average, we observe that German banks hold substantially less reserves than their daily average required reserves. Thus in contrast to other EMU banks, German banks back load the fulfillment of their reserve requirements over the reserve maintenance period and thereby benefit from the general pattern in the EONIA. Looking at the disaggregate data we find than this is particularly the case for the Landesbanks. We argue that the end of the calender month effect in the EONIA may be driven by a temporary shortage of liquidity, relative to reserve requirements, at the beginning of the maintenance period (which coincides with the end of the calendar month).

Heterogenous banking supervision and regulation is often considered as the most important impediment for Pan-European Bank mergers. In this paper we identify other more fundamental reasons for a limited degree of cross-country integration in retail banking. We argue that the distribution of regional liquidity shocks may pose a natural limit to the extent of cross-border bank mergers. The paper derives the impact of different underlying stochastic structures on the optimal structure of cross regional bank mergers. Imposing a symmetry restriction on the underlying stochastic structure of liquidity shocks we find that benefits from diversification and the costs of contagion may be optimally traded off if banks from some but not from all regions merge. Under an additional monotonicity assumption full integration is only desirable if the number of regions with diverse risks is sufficiently large.

We analyze the impact of financial crises and monetary policy on the supply of wholesale funding liquidity, and also on the compositional supply effects through cross-border and relationship lending. For empirical identification, we draw on the proprietary bank-to-bank European interbank dataset extracted from Target2 and also exploit the Lehman and sovereign crisis shocks as well as the main Eurosystem non-standard monetary policy measures. The robust results imply that the crisis shocks lead to worse access, volumes and spreads (in both the overnight and longer-term maturities). The quantitative impact on interbank access and volume is stronger than on spreads. Liquidity supply restrictions are exacerbated for cross-border lending after the Lehman failure; for banks headquartered in periphery countries, the impact is quantitatively stronger in the sovereign debt crisis. Moreover, the interbank market – unlike other credit markets – allows to exploit the price dispersion from different lenders on identical credit contracts, i.e. overnight uncollateralized loans in the same morning for the same borrower. This price dispersion increases massively with the crisis, and even more for riskier borrowers. Cross-border and previous relationship lenders charge higher prices for identical contracts in the crisis. Importantly, this price dispersion substantially decreases when the Eurosystem promises unlimited access to liquidity at a fixed price in October 2008 and announces the 3-year LTRO in December 2011, with economically stronger effects for borrowers in weaker countries.

To answer the question what causes an asset to be illiquid, we analyze the impact that transparency of corporate accounting information has on the liquidity of its traded bonds. In particular, we focus on how this relationship depends on aggregate liquidity and the financial state of the firm. We use an extensive panel data set comprising more than 40,000 quarterly bond observations between 2004Q4 and 2012Q4. We find a statistically and economically significant impact of transparency on bond liquidity. This relationship becomes stronger during times of financial distress. We also find that the impact of transparency on liquidity is much larger than the influence of credit risk. Finally, we also find that transparent accounting information has a strong effect on liquidity risk.

We analyze the trading book of a key market maker in the European unsecured money market and study the extent to which liquidity risks accumulated by this market maker affect his pricing of liquidity and the bid-ask-spread he quotes on unsecured borrowing and lending. We find that the larger the funding liquidity risk assumed by the market maker the higher the market price for liquidity and the higher his term premium. Furthermore, his bid-ask-spread and the sensitivity of his bid-ask-spread to the maturity of transactions increases as his assumed liquidity risk rises. This suggests that also in the unsecured money market funding constraints and funding risks of the market maker affect market liquidity in line with Gromp and Vayanos (2004) and Brunnermeier and Pedersen (2009).

In this paper, we focus on the interconnectedness of banks and the price they pay for liquidity. We assess how the concentration of credit relationships and the position of a bank in the network topology of the system influence the bank’s ability to meet liquidity demand. We use quarterly data of bilateral interbank credit exposure among all German banks from 2000 to 2008 to measure interbank relationships and network characteristics. We match these data with bids placed by individual banks in the European Central Bank’s (ECB) weekly repo auctions. The bids measure each bank’s willingness to pay for liquidity, since they had variable rate tenders with a “pay-your-bid” price. Controlling for bank characteristics and the daily fulfillment of reserve requirements, we find that banks with a more diversified borrowing structure in the interbank market bid significantly less aggressively and pay a lower price for liquidity in the ECB’s main refinancing operations. These findings suggest that incentives to diversify banks’ liquidity risk dominate the benefits of private information. When the network position of the bank is taken into account, we find that central lenders in the money market bid more aggressively in auctions.

We use a unique data set that comprises each bank's bids in the Eurosystem's main refinancing operations and its recourse to the LOLR facility (a) to derive banks' willingness-to-pay for liquidity through a one-week repo and (b) to show that a bank's willingness-to-pay is a good indicator for the probability that this bank draws on the LOLR facility. Our results suggest (i) that banks' willingness-to-pay for liquidity indeed reflects refinancing conditions in the interbank market and (ii) that the willingness-to-pay can serve as an early warning indicator for banking distress.

We study the conflict of interests that might arise at universal banks between their proprietary trading and their retail banking. Using a unique data set that covers the stock investments of each German bank and of its respective retail customers on a securityby-security basis we study the return characteristics of those stocks that flow from a bank’s proprietary portfolio into its respective customers’ portfolio. Our results show that those stocks that are removed from banks’ proprietary portfolio into the portfolio of their respective customers are lower performing than the average stock held in both banks and customers portfolios. This suggests that banks abuse their role in advising retail investors in order to dump low performing stocks.

This paper studies the implications of cross-border financial integration for financial stability when banks' loan portfolios adjust endogenously. Banks can be subject to sectoral and aggregate domestic shocks. After integration they can share these risks in a complete interbank market. When banks have a comparative advantage in providing credit to certain industries, financial integration may induce banks to specialize in lending. An enhanced concentration in lending does not necessarily increase risk, because a well-functioning interbank market allows to achieve the necessary diversification. This greater need for risk sharing, though, increases the risk of cross-border contagion and the likelihood of widespread banking crises. However, even though integration increases the risk of contagion it improves welfare if it permits banks to realize specialization benefits. JEL Classification: D61, E44, G21

This paper empirically investigates the effect of interbank relationship lending on banks’ access to liquidity. Our analysis is based on German interbank payment data which we use to create a panel of unsecured overnight loans between 1079 bank pairs. The data shows that banks rely on repeated interactions with the same counterparties to trade liquidity. For the price of credit, we find that in the run-up to the recent financial crisis of 2007/08 relationship lenders charged already higher interest rates to their borrowers after controlling for other bank specific characteristics. By contrast, during the crisis borrowers paid on average lower rates to their relationship lenders compared to spot lenders. We argue that the observed interest rate differences are in line with relationship lenders having private information about the creditworthiness of their borrowers.

This paper empirically investigates the effect of interbank relationship lending on banks' access to liquidity. Our analysis is based on German interbank payment data which we use to create a panel of unsecured overnight loans between 1079 distinct borrower-lender pairs. The data shows that banks rely on repeated interactions with the same counterparties to trade liquidity. For the price of liquidity, we find that in the run-up to the recent financial crisis of 2007/08 relationship lenders charged already higher interest rates to their borrowers after controlling for other bank specific characteristics and general market conditions. By contrast, during the crisis borrowers paid on average lower rates to their relationship lenders compared to spot lenders. The observed interest rate differences are statistically and economically significant and in line with theory that relationship lenders have private information about the creditworthiness of their close borrowers.

While net settlement systems make more efficient use of liquidity than gross settlement systems, they are known to generate systemic risk. What does that tendency imply for the stability of the payments (or financial) system when the two settlement systems coexist? Do liquidity shortages induce banks to settle more transactions in the net settlement system, thereby increasing systemic risk? Or do banks require their counterparties to send payments through the gross settlement system when default risks are high, increasing the need for liquidity and the money market rate but reducing overall systemic risk? This paper studies the factors that drive the relative importance of net and gross settlement systems over the short run, using daily data on transaction volumes from the large- volume payment systems of all euro area countries that have had both a net and a gross settlement system at the same time. Applying a large portfolio of different econometric techniques, we find that it is actually the transaction volumes in gross settlement systems that affect the daily price of liquidity and the credit risk spread in money markets.

We study a conflict of interest faced by universal banks that conduct proprietary trading alongside their retail banking services. Our dataset contains - on a security-by-security basis - the stock holdings of each and every German bank and the stock holdings of the corresponding retail clients. The dataset allows us to analyze (i) whether banks deliberately push stocks from their proprietary portfolios into the portfolios of their retail customers, (ii) whether those stocks subsequently underperform, and (iii) whether retail clients of banks with proprietary trading earn lower long-term portfolio returns than do retail clients of less conflicted banks. We present affirmative evidence on each of these three questions and conclude that proprietary trading can, in fact, be very detrimental to retail investors.

We identify frictions in the market for liquidity as well as bank-specific and market-wide factors that affect the prices that banks pay for liquidity, captured here by borrowing rates in repos with the central bank and benchmarked by the overnight index swap. We have price data at the individual bank level and, unique to this paper, data on individual banks’ reserve requirements and actual reserve holdings, thus allowing us to gauge the extent to which a bank is short or long liquidity. We find that the price a bank pays for liquidity depends on the liquidity positions of other banks, as well as its own. There is evidence that liquidity squeezes occasionally occur and short banks pay more the larger is the potential for a squeeze. The price paid for liquidity is decreasing in bank size and small banks are more adversely affected by an increased potential for a squeeze. Healthier banks pay less, but contrary to what one might expect, banks in formal liquidity networks do not.

Am 3. Juli 2009 verabschiedete die Bundesregierung das Bad-Bank-Gesetz mit dem Ziel, die Bankbilanzen zu entlasten und eine drohende Kreditklemme abzuwenden Für Falko Fecht European Business School, Oestrich-Winkel, und Hans Peter Grüner, Universität Mannheim, Ist dieses Modell nicht überzeugend. Der Gesetzentwurf der Bundesregierung enthalte erhebliche Risiken, weil er die Anreize der Banken verzerre. Auch zur Rekapitalisierung der Banken sei dies keine effiziente Methode. Stattdessen sollte sich die Bundesregierung auf die Lösung des Lemon-Problems im Bankensektor konzentrieren und Assets in einer Auktion aufkaufen. Nach Ansicht von Manfred Jäger, Institut der deutschen Wirtschaft, Köln, kann dieses Vorhaben der Bundesregierung nicht ganz gelingen. Zwar sei das das Gesetz zu begrüßen, denn in einigen Fällen werde es helfen. Aber es werde „in ungünstigen, aber nicht unwahrscheinlichen Fällen" nicht wesentlich zur Verbesserung der Kreditgewährung beitragen, da es zu keiner Lösung des Schuldenüberhangproblems komme. Auch Frank Westermann, Universität Osnabrück, bezweifelt, dass die Ausgestaltung des verabschiedeten Rettungspakets im Rahmen einer Bad Bank ausreicht kann, eine drohende Kreditklemme abzuwenden.

We use a unique and comprehensive data set on open-end real estate funds in Germany to study a liquidity crisis that hit this industry between 2005 and 2006. Since this industry is comparably unregulated our data set permits us to contrast competing explanations of liquidity crisis. We find that fundamental factors matter for the liquidity outflow in normal times. During the crisis, however, they do not play a role. During the panic only strategic complementarities drive withdrawals. Furthermore, we find that funds with a higher load fee suffer from substantially larger outflows in the crisis period, while a higher load fee reduces gross outflows in normal times. As institutional investors predominately invest in funds with a low load fee this is in line with recent theory arguing that complementarities are mitigated by the involvement of large institutional investors who can at least partially correct for the coordination failure resulting from complementarities.

This paper studies the implications of cross-border financial integration for financial stability when banks' loan portfolios adjust endogenously. Banks can be subject to sectoral and aggregate domestic shocks. After integration they can share these risks in a complete interbank market. When banks have a comparative advantage in providing credit to certain industries, financial integration may induce banks to specialize in lending. An enhanced concentration in lending does not necessarily increase risk, because a well-functioning interbank market allows to achieve the necessary diversification. This greater need for risk sharing, though, increases the risk of cross-border contagion and the likelihood of widespread banking crises. However, even though integration increases the risk of contagion it improves welfare if it permits banks to realize specialization benefits.

Summary Open-End Real Estate Funds in Germany – Genesis and Crisis Open-end real estate funds are of particular importance in the German bank-dominated financial system. However, recently the German open-end fund industry came under severe distress which triggered a broad discussion of required regulatory interventions. This paper gives a detailed description of the institutional structure of these funds and of the events that led to the crisis. Furthermore, it applies recent banking theory to open-end real estate funds in order to understand why the open-end fund structure was so prevalent in Germany. Based on these theoretical insights we evaluate the various policy recommendation that have been raised. (JEL G14, G21, G23)

Money markets have two functions, the allocation of liquidity and the processing of information. We develop a model that allows us to evaluate the efficiency of different money market derivatives regarding these two objectives. We assume that due to its size, a large bank receives a more precise signal about the overall liquidity development in the banking sector. In an upcoming liquidity shortage this large bank can exploit its informational advantage in the spot money market by rationing liquidity. Using forward contracts, the large bank can credibly commit not to squeeze small banks in the event of a liquidity shortage. But forward contracts do not provide incentives for the large bank to pass on its information to other banks. In contrast, lines of credit between the large and the small banks ensure that the large bank provides its information to other banks.

In this paper, we address the question whether increasing households' financial market access improves welfare in a financial system in which there is intense competition among banks for private households' funds. Following earlier work by Diamond and by Fecht, we use a model in which the degree of liquidity insurance offered to households through banks' deposit contracts is restrained by households' financial market access. However, we also assume spatial monopolistic competition among banks. Because monopoly rents are assumed to bring about inefficiencies, improved financial market access that limits monopoly rents also entails a positive effect; however, this beneficial effect is only relevant if competition among banks does not sufficiently restrain monopoly rents already. ; Thus, our results suggest that in Germany's bank-dominated financial system, which is characterized by intense competition for households' deposits, improved financial market access might reduce welfare because it only reduces risk sharing. In contrast, in the U.S. banking system, where there is less competition for households' deposits, a high level of household financial market participation might be beneficial.

This paper analyzes the individual bidding behavior of German banks in the money market auctions conducted by the ECB from the beginning of the third quarter of 2000 to the end of the first quarter of 2001. Our approach takes a variety of characteristics of the individual banks into account. In particular, we consider variables that capture the different use of liquidity and the different attitude towards liquidity risk of the individual banks. It turns out that these characteristics are reflected in the banks’ respective bidding behavior to a large extent. Thus our study contributes to a deeper understanding of the way liquidity risk is managed in the banking sector.

This paper analyzes the individual bidding behaviour of German banks in the money market auctions conducted by the ECB from the beginning of the third quarter of 2000 to the end of the first quarter of 2001. Our approach takes a variety of characteristics of the individual banks into account. In particular, we consider variable that capture the different use of liquidity and the different attitude towards liquidity risk of the individual banks. It turns out that these characteristics are reflected in the banks' respective bidding behaviour to a large extent. Thus our study contributes to a deeper understanding of the way liquidity risk is managed in the banking sctor.

Following Diamond (1997) we use a model in which financial market access of households restrains the efficiency of the liquidity insurance that banks' deposit contracts provide to households that are subject to idiosyncratic liquidity shocks. But in contrast to these approaches we assume spatial monopolistic competition among banks. Since monopoly rents are assumed to bring about inefficiencies, improved financial market access that limits monopoly rents also entails a positive effect. But this beneficial effect is only relevant if competition among banks does not sufficiently restrain monopoly rents already. Thus, our results suggest that in the bank-dominated financial system of Germany, in which banks intensely compete for households' deposits, improved financial market access might reduce welfare because it only reduces risk sharing. In contrast, in the banking system of the U.S., with less competition for households' deposits, a high level of households' financial market participation might be beneficial.