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The failure mechanics of dealer banks

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  • Darrell Duffie

Abstract

I explain the key failure mechanics of large dealer banks, and some policy implications. This is not a review of the financial crisis of 2007–2009. Systemic risk is considered only in passing. Both the financial crisis and the systemic importance of large dealer banks are nevertheless obvious and important motivations.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 301.

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Length: 39 pages
Date of creation: Mar 2010
Date of revision:
Handle: RePEc:bis:biswps:301

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Related research

Keywords: liquidity; dealer banks; OTC markets; financial crisis;

This paper has been announced in the following NEP Reports:

References

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  1. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  2. Elisabeth Ledrut & Christian Upper, 2007. "Changing post-trading arrangements for OTC derivatives," BIS Quarterly Review, Bank for International Settlements, December.
  3. Milbourn, Todd T. & Boot, Arnoud W. A. & Thakor, Anjan V., 1999. "Megamergers and expanded scope: Theories of bank size and activity diversity," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 195-214, February.
  4. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  5. Ewerhart, Christian & Tapking, Jens, 2008. "Repo markets, counterparty risk and the 2007/2008 liquidity crisis," Working Paper Series 0909, European Central Bank.
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Citations

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Cited by:
  1. Robert E. Lucas, Jr. & Nancy L. Stokey, 2011. "Liquidity crises," Economic Policy Paper 11-3, Federal Reserve Bank of Minneapolis.
  2. Carruthers, Bruce G., 2013. "Diverging derivatives: Law, governance and modern financial markets," Journal of Comparative Economics, Elsevier, vol. 41(2), pages 386-400.
  3. Kalemli-Ozcan, Sebnem & Sorensen, Bent & Yesiltas, Sevcan, 2012. "Leverage across firms, banks, and countries," Journal of International Economics, Elsevier, vol. 88(2), pages 284-298.
  4. Chevallier, Julien, 2012. "Global imbalances, cross-market linkages, and the financial crisis : a multivariate Markov-Switching analysis," Economics Papers from University Paris Dauphine 123456789/8773, Paris Dauphine University.
  5. David Murphy, 2012. "Maintaining Confidence," FMG Special Papers sp216, Financial Markets Group.
  6. Chan-Lau, Jorge A. & Liu, Estelle X. & Schmittmann, Jochen M., 2013. "Equity returns in the banking sector in the wake of the great recession and the European sovereign debt crisis," Discussion Papers 32/2013, Deutsche Bundesbank, Research Centre.
  7. Cochrane, John H., 2011. "Understanding policy in the great recession: Some unpleasant fiscal arithmetic," European Economic Review, Elsevier, vol. 55(1), pages 2-30, January.
  8. Timothy J. Riddiough, 2011. "Can Securitization Work? Economic, Structural and Policy Considerations," Working Papers 242011, Hong Kong Institute for Monetary Research.
  9. Hubert Janos Kiss & Ismael Rodriguez-Lara & Alfonso Rosa-Garcia, 2013. "Do Social Networks Prevent or Promote Bank Runs?," IEHAS Discussion Papers 1344, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  10. Sheri M. Markose, 2012. "Systemic Risk from Global Financial Derivatives," IMF Working Papers 12/282, International Monetary Fund.
  11. Jan Wrampelmeyer, 2013. "Darrell Duffie: How big banks fail and what to do about it," Financial Markets and Portfolio Management, Springer, vol. 27(2), pages 253-256, June.
  12. Priyank Gandhi & Hanno Lustig, 2010. "Size Anomalies in U.S. Bank Stock Returns: A Fiscal Explanation," NBER Working Papers 16553, National Bureau of Economic Research, Inc.
  13. Jimmy Melo, 2014. "Expectativas cambiarias, selección adversa y liquidez," Ensayos Revista de Economia, Universidad Autonoma de Nuevo Leon, Facultad de Economia, vol. 0(1), pages 27-62, May.
  14. Upper, Christian, 2011. "Simulation methods to assess the danger of contagion in interbank markets," Journal of Financial Stability, Elsevier, vol. 7(3), pages 111-125, August.
  15. Oehmke, Martin, 2014. "Liquidating illiquid collateral," Journal of Economic Theory, Elsevier, vol. 149(C), pages 183-210.
  16. Jason Wu, 2013. "Discussion of The Economics of Shadow Banking," RBA Annual Conference Volume, in: Alexandra Heath & Matthew Lilley & Mark Manning (ed.), Liquidity and Funding Markets Reserve Bank of Australia.

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