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Matching collateral supply and financing demands in dealer banks

Author

Listed:
  • Adam Kirk
  • James J. McAndrews
  • Parinitha Sastry
  • Phillip Weed

Abstract

The failure and near-collapse of some of the largest dealer banks on Wall Street in 2008 highlighted the marked vulnerability of the industry. Dealer banks are financial intermediaries that make markets for many securities and derivatives. Like standard banks, dealer banks may derive the funding for a loan from their own equity or from external sources, such as depositors or creditors. Unlike standard banks, however, dealer banks rely heavily upon collateralized borrowing and lending, which give rise to ?internal? sources of financing. This article provides a descriptive and analytical perspective on dealer banks and their sources of financing, both internal and external. The authors conclude that internal sources of financing may prove more efficient than external sources of financing in normal times, but may be subject to significant and abrupt reductions in stressful times. The analysis suggests that accounting rules that allow dealer banks to net certain collateralized transactions may obscure the banks? actual economic exposure to their customers, and that a prudent risk management framework should acknowledge the risks inherent in collateralized finance.

Suggested Citation

  • Adam Kirk & James J. McAndrews & Parinitha Sastry & Phillip Weed, 2014. "Matching collateral supply and financing demands in dealer banks," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 127-151.
  • Handle: RePEc:fip:fednep:00014
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    References listed on IDEAS

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    1. Tobias Adrian & Brian Begalle & Adam Copeland & Antoine Martin, 2013. "Repo and Securities Lending," NBER Chapters, in: Risk Topography: Systemic Risk and Macro Modeling, pages 131-148, National Bureau of Economic Research, Inc.
    2. Darrell Duffie, 2010. "The Failure Mechanics of Dealer Banks," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 51-72, Winter.
    3. James Aitken & Mr. Manmohan Singh, 2009. "Deleveraging After Lehman: Evidence From Reduced Rehypothecation," IMF Working Papers 2009/042, International Monetary Fund.
    4. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
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    Cited by:

    1. Bergbrant, Mikael C. & Hunter, Delroy M., 2018. "(How) do credit market conditions affect firms' post-hedging outcomes? Evidence from bank lending standards and firms' currency exposure," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 203-222.
    2. Mark Carlson & Burcu Duygan-Bump & Fabio Natalucci & Bill Nelson & Marcelo Ochoa & Jeremy Stein & Skander Van den Heuvel, 2016. "The Demand for Short-Term, Safe Assets and Financial Stability: Some Evidence and Implications for Central Bank Policies," International Journal of Central Banking, International Journal of Central Banking, vol. 12(4), pages 307-333, December.
    3. Baranova, Yuliya & Liu, Zijun & Noss, Joseph, 2016. "The role of collateral in supporting liquidity," Bank of England working papers 609, Bank of England.
    4. Gorton, Gary & Laarits, Toomas & Metrick, Andrew, 2020. "The run on repo and the Fed’s response," Journal of Financial Stability, Elsevier, vol. 48(C).
    5. Johannes Brumm & Michael Grill & Felix Kubler & Karl Schmedders, 2023. "Re-use of collateral: Leverage, volatility, and welfare," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 47, pages 19-46, January.
    6. Nina Boyarchenko & Thomas M. Eisenbach & Pooja Gupta & Or Shachar & Peter Van Tassel, 2018. "Bank-Intermediated Arbitrage," Liberty Street Economics 20181018, Federal Reserve Bank of New York.
    7. Nicola Cetorelli, 2014. "Hybrid intermediaries," Staff Reports 705, Federal Reserve Bank of New York.
    8. Thomas Michl & Hyun Woong Park, 2023. "Shadow Banks and the Collateral Multiplier," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 49(2), pages 156-175, April.
    9. Maurin, Vincent, 2022. "Asset scarcity and collateral rehypothecation," Journal of Financial Intermediation, Elsevier, vol. 52(C).
    10. Bank for International Settlements, 2015. "Central bank operating frameworks and collateral markets," CGFS Papers, Bank for International Settlements, number 53, december.
    11. Butz, M. & Oomen, R., 2019. "Internalisation by electronic FX spot dealers," LSE Research Online Documents on Economics 90485, London School of Economics and Political Science, LSE Library.

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    More about this item

    Keywords

    dealer banks; financing; financial crises;
    All these keywords.

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G01 - Financial Economics - - General - - - Financial Crises
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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