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Abstract: 

The period since 2004 has seen a significant increase in commercial bank investment in municipal debt, with bank holdings of municipal debt rising from 5.2% of the municipal market in 2004 to almost 10% of the market by the end of 2012. This paper places this increase into historical context. Although there has been some shuffling, in the cross section, the holdings of municipal debt 12 years ago are a remarkably strong predictor of holdings today. There is some evidence that municipal bond index returns have become correlated with bank stock returns.

Keywords: Municipal bonds, direct bank investment, loan vs. security

Affiliations:  1: Brandeis International Business School; 2: Intuitive Analytics.