Staff Reports
Monetary Policy and the Run Risk of Loan Funds
Number 1008
March 2022

JEL classification: G23, E52, G28

Authors: Nicola Cetorelli, Gabriele La Spada, and João A.C. Santos

Loan funds are open-end mutual funds holding predominantly corporate leveraged loans. We document empirically that loan funds are significantly more susceptible to run risk than any other category of debt funds, including corporate bond funds. Most importantly, we establish a link between loan funds’ flows and monetary policy, based on the institutional characteristics of their portfolio holdings. We find robust evidence indicating a pro-cyclical relationship between monetary policy and loan-fund flows. This relationship, however, is asymmetric: weaker for policy-rate increases and stronger for policy-rate decreases. Finally, the effect of monetary policy shocks on loan-fund flows also depends on the level of market short-term rates, suggesting that it is not only the direction of the monetary policy change that matters, but also the level of the policy rate at the time of the change. Our results thus identify a novel channel of monetary policy transmission affecting a critical segment of the credit sector, represented by leveraged lending.

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AUTHOR DISCLOSURE STATEMENT(S)
Nicola Cetorelli
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.

Gabriele La Spada
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.

João A. C. Santos
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.
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