The credit crisis and the dynamics of asset backed commercial paper programs
AbstractMotivated by the credit crisis 2007-08, this paper presents a theory of ¶capital market banks¶; banks that use derivative programs to exploit ine¢ ciencies in the capital markets. I model banks. use of asset backed commercial paper (ABCP) programs as a local game, and analyse how these programs affect financial stability. In a financial market where banks are subject to costly capital requirements and investors are heterogeneous, the ABCP program arises endogenously in response to inefficient risk sharing. The sustainability of the ABCP program depends crucially on the sponsoring bank's capital. Small shocks to the bank's capital can lead to a failure of the ABCP program. This amplifies the shock and pushes the the bank into bankruptcy. I link the dynamics of the ABCP market to the interbank market, and argue that an unravelling of the ABCP market can cause a seizure of the interbank market. The model indicates, that traditional monetary policy is unable to alleviate seizures of the interbank market, but that targeted liquidity measures, such as the ¶Term Securities Lending Facility¶, the ¶Term Auction Facility¶, the ¶Troubled Asset Relief Program¶, the ¶Money Market ABCP Program¶ and the launch of a ¶super fund¶, could end the unravelling of the ABCP market and ease the pressures in the interbank market.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Financial Markets Group in its series FMG Discussion Papers with number dp625.
Date of creation: Jan 2009
Date of revision:
Contact details of provider:
Web page: http://www.lse.ac.uk/fmg/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-04-05 (All new papers)
- NEP-BAN-2009-04-05 (Banking)
- NEP-CBA-2009-04-05 (Central Banking)
- NEP-MON-2009-04-05 (Monetary Economics)
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (The FMG Administration).
If references are entirely missing, you can add them using this form.