Do Non-Banks Need Access to the Lender of Last Resort? Evidence from Fund Runs

When a liquidity crisis hits non-bank financial intermediaries, which central bank interventions help? We show that mutual funds faced unprecedented investor outflows as the COVID-19 shock hit and assess the effectiveness of central bank asset purchases and additional liquidity provision to banks in alleviating the crisis. We use detailed fund-level data and proprietary data on bank take-ups in liquidity-providing operations and bank-fund repo transactions. Analyzing asset purchases, we find that funds with higher shares of assets eligible for central bank purchases in their portfolio before the COVID-19 crisis saw their performance improve by 3.7% and outflows decrease by 66% relative to otherwise similar funds. Analyzing repo activity, we do not find that additional central bank liquidity provision to banks in March 2020 led to more lending to funds trading with their relationship banks. Rather, banks increased the maturity of their lending to funds in the weeks that followed the announcement and the implementation of additional asset purchases. Our results suggest that central bank asset purchases were effective in stopping fire-sale dynamics and staving off runs on non-bank financial intermediaries, even though funds did not have direct access to the lender of last resort.