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Stability of funding models: an analytical framework

Author

Listed:
  • Eisenbach, Thomas M.

    () (Federal Reserve Bank of New York)

  • Keister, Todd

    (Federal Reserve Bank of New York)

  • McAndrews, James J.

    (Federal Reserve Bank of New York)

  • Yorulmazer, Tanju

    (Federal Reserve Bank of New York)

Abstract

With the recent financial crisis, many financial intermediaries experienced strains created by declining asset values and a loss of funding sources. In reviewing these stress events, one notices that some arrangements appear to have been more stable—that is, better able to withstand shocks to their asset values and/or funding sources—than others. Because the precise determinants of this stability are not well understood, gaining a better grasp of them is a critical task for market participants and policymakers as they try to design more resilient arrangements and improve financial regulation. This article uses a simple analytical framework to illustrate the determinants of a financial intermediary’s ability to survive stress events. An intermediary in the framework faces two types of risk: the value of its assets may decline and/or its short-term creditors may decide not to roll over their debt. The authors measure stability by looking at the combinations of shocks the intermediary can experience while remaining solvent. They study how stability depends on the intermediary’s balance-sheet characteristics, such as its leverage, the maturity structure of its debt, and the liquidity and riskiness of its asset portfolio. They also show how the framework can be applied to examine current policy issues, including liquidity requirements, discount window policy, and different approaches to reforming money market mutual funds.

Suggested Citation

  • Eisenbach, Thomas M. & Keister, Todd & McAndrews, James J. & Yorulmazer, Tanju, 2014. "Stability of funding models: an analytical framework," Economic Policy Review, Federal Reserve Bank of New York, issue Feb, pages 29-47.
  • Handle: RePEc:fip:fednep:00007
    as

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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Banal-Estanol, Albert & Benito, Enrique & Khametshin, Dmitry, 2017. "Asset encumbrance and bank risk: First evidence from public disclosures in Europe," CEPR Discussion Papers 12168, C.E.P.R. Discussion Papers.
    2. Ahnert, Toni & Anand, Kartik & Gai, Prasanna & Chapman, James, 2015. "Safe, or not safe? Covered bonds and Bank Fragility," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112875, Verein für Socialpolitik / German Economic Association.
    3. Adrian Van Rixtel & Luna Romo González & Jing Yang, 2015. "The determinants of long-term debt issuance by European banks: evidence of two crises," BIS Working Papers 513, Bank for International Settlements.
    4. Bleich, Dirk, 2014. "Contingent convertible bonds and the stability of bank funding: The case of partial writedown," Discussion Papers 28/2014, Deutsche Bundesbank.
    5. Ahnert, Toni & Anand, Kartik & Gai, Prasanna & Chapman, James, 2015. "Safe, or not safe? Covered bonds and Bank Fragility," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112875, Verein für Socialpolitik / German Economic Association.
    6. Karel Brůna & Naďa Blahová, 2015. "Ekonomické a regulatorní podmínky řízení likvidity v bankovním sektoru České republiky v kontextu aplikace poměru likvidního krytí
      [Economic and Regulatory Conditions of Liquidity Management in the
      ," Politická ekonomie, University of Economics, Prague, vol. 2015(6), pages 768-713.
    7. Karel Brůna & Naďa Blahová, 2015. "Ekonomické a regulatorní podmínky řízení likvidity v bankovním sektoru České republiky v kontextu aplikace poměru likvidního krytí
      [Economic and Regulatory Conditions of Liquidity Management in the
      ," Politická ekonomie, University of Economics, Prague, vol. 2015(6), pages 689-713.
    8. repec:eee:quaeco:v:66:y:2017:i:c:p:302-313 is not listed on IDEAS
    9. Choi, Dong Boem & Eisenbach, Thomas M. & Yorulmazer, Tanju, 2015. "Watering a lemon tree: heterogeneous risk taking and monetary policy transmission," Staff Reports 724, Federal Reserve Bank of New York, revised 01 Nov 2017.
    10. Yorulmazer, Tanju, 2014. "Literature review on the stability of funding models," Economic Policy Review, Federal Reserve Bank of New York, issue Feb, pages 3-16.
    11. Jean-Loup SOULA, 2015. "Measuring heterogeneity in bank liquidity risk: who are the winners and the losers?," Working Papers of LaRGE Research Center 2015-09, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    12. Karel Brůna & Naďa Blahová, 2016. "Systemic Liquidity Shocks and Banking Sector Liquidity Characteristics on the Eve of Liquidity Coverage Ratio Application - The Case of the Czech Republic," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 5(1), pages 159-184.
    13. Hirtle, Beverly & Kovner, Anna & Vickery, James & Bhanot, Meru, 2016. "Assessing financial stability: The Capital and Loss Assessment under Stress Scenarios (CLASS) model," Journal of Banking & Finance, Elsevier, vol. 69(S1), pages 35-55.

    More about this item

    Keywords

    financial crisis; bank run; market run; maturity; wholesale funding; liquidity;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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