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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;

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References

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  1. Ewerhart, Christian & Tapking, Jens, 2008. "Repo markets, counterparty risk and the 2007/2008 liquidity crisis," Working Paper Series, European Central Bank 0909, European Central Bank.
  2. Elisabeth Ledrut & Christian Upper, 2007. "Changing post-trading arrangements for OTC derivatives," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, December.
  3. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(3), pages 401-19, June.
  4. 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, Elsevier, vol. 23(2-4), pages 195-214, February.
  5. Larry D. Wall & Ellis W. Tallman & Peter A. Abken, 1996. "The impact of a dealer's failure on OTC derivatives market liquidity during volatile periods," Working Paper, Federal Reserve Bank of Atlanta 96-6, Federal Reserve Bank of Atlanta.
  6. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 84(3), pages 488-500, August.
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Citations

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Cited by:
  1. Hubert Janos Kiss & Ismael Rodriguez-Lara & Alfonso Rosa-Garcia, 2013. "Do Social Networks Prevent or Promote Bank Runs?," IEHAS Discussion Papers, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences 1344, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  2. David Murphy, 2012. "Maintaining Confidence," FMG Special Papers, Financial Markets Group sp216, Financial Markets Group.
  3. 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.
  4. Robert E. Lucas, Jr. & Nancy L. Stokey, 2011. "Liquidity crises," Economic Policy Paper, Federal Reserve Bank of Minneapolis 11-3, Federal Reserve Bank of Minneapolis.
  5. René M. Stulz, 2014. "Governance, Risk Management, and Risk-Taking in Banks," NBER Working Papers 20274, National Bureau of Economic Research, Inc.
  6. Carruthers, Bruce G., 2013. "Diverging derivatives: Law, governance and modern financial markets," Journal of Comparative Economics, Elsevier, vol. 41(2), pages 386-400.
  7. Jan Wrampelmeyer, 2013. "Darrell Duffie: How big banks fail and what to do about it," Financial Markets and Portfolio Management, Springer, Springer, vol. 27(2), pages 253-256, June.
  8. Upper, Christian, 2011. "Simulation methods to assess the danger of contagion in interbank markets," Journal of Financial Stability, Elsevier, Elsevier, vol. 7(3), pages 111-125, August.
  9. Cochrane, John H., 2011. "Understanding policy in the great recession: Some unpleasant fiscal arithmetic," European Economic Review, Elsevier, Elsevier, vol. 55(1), pages 2-30, January.
  10. Sebnem Kalemli-Ozcan & Bent Sorensen & Sevcan Yesiltas, 2011. "Leverage Across Firms, Banks and Countries," NBER Chapters, in: Global Financial Crisis National Bureau of Economic Research, Inc.
  11. Timothy J. Riddiough, 2011. "Can Securitization Work? Economic, Structural and Policy Considerations," Working Papers 242011, Hong Kong Institute for Monetary Research.
  12. Jason Wu, 2013. "Discussion of The Economics of Shadow Banking," RBA Annual Conference Volume, Reserve Bank of Australia, in: Alexandra Heath & Matthew Lilley & Mark Manning (ed.), Liquidity and Funding Markets Reserve Bank of Australia.
  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. Oehmke, Martin, 2014. "Liquidating illiquid collateral," Journal of Economic Theory, Elsevier, Elsevier, vol. 149(C), pages 183-210.
  15. 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.
  16. 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.
  17. Sheri M. Markose, 2012. "Systemic Risk from Global Financial Derivatives," IMF Working Papers 12/282, International Monetary Fund.

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