The Impact of Private Money Creation: Asset Allocation and “Opacity Discount” in Bank Lending
Professor Jan Bena
Associate Professor and Finance Division Chair
Bank of Montreal Chair in International Finance
Sauder School of Business
The University of British Columbia
This paper examines how the private money creation function of financial intermediaries influences their asset composition and firms’ cost of debt. Following Dang,
Gorton, Holmström, and Ordonez (2017), we hypothesize that intermediaries create money-like liabilities by backing them with assets that are safe and opaque, thereby
minimizing information sensitivity. Using a quasi-natural experiment—the 2014 U.S. MMF reform—we show that changes in the moneyness of MMF liabilities significantly impact their asset allocation. Institutional MMFs reduced their portfolio weight of opaque assets—defined as holdings disclosed under generic and minimally informative categories by the MMFs—by 55%. Furthermore, firm-level analysis of syndicated loans and bond issuances reveals that positive information acquisition cost shock to borrowers reduce the loan-bond spread—the relative cost of firm financing using bank loans versus the public bond market—highlighting the “opacity discount” in bank lending. Instrumental variable estimation and event studies support the causal interpretation of our findings.
