Liquidity Support in Financial Institutions

Abstract

We document that banks facilitate liquidity provision to their affiliated mutual funds that experience excessive withdrawals. The liquidity support, which mainly originates from institutional and retail clients of banks, limits the negative performance effects of financial distress and mitigates strategic complementarities. Parent bank flows during distress periods predict superior future fund performance over the following six months, suggesting that banks act as a coordination device for their clients to internalize the liquidity premium. Our findings demonstrate the existence of a mutual support system within financial institutions, and further highlight the potential benefits of bank-affiliation for fund investors.