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Matching collateral supply and financing demands in dealer banks

Author

Listed:
  • Kirk, Adam

    (Federal Reserve Bank of New York)

  • McAndrews, James J.

    (Federal Reserve Bank of New York)

  • Sastry, Parinitha
  • Weed, Phillip

    (Federal Reserve Bank of New York)

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

  • Kirk, Adam & McAndrews, James J. & Sastry, Parinitha & Weed, Phillip, 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

    as
    1. James Aitken & Manmohan Singh, 2009. "Deleveraging After Lehman; Evidence From Reduced Rehypothecation," IMF Working Papers 09/42, International Monetary Fund.
    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. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
    4. 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.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. repec:eee:corfin:v:50:y:2018:i:c:p:203-222 is not listed on IDEAS
    2. Baranova, Yuliya & Liu, Zijun & Noss, Joseph, 2016. "The role of collateral in supporting liquidity," Bank of England working papers 609, Bank of England.
    3. Michael Grill & Karl Schmedders & Felix Kubler & Johannes Brumm, 2017. "Re-use of Collateral: Leverage, Volatility, and Welfare," 2017 Meeting Papers 697, Society for Economic Dynamics.
    4. Bank for International Settlements, 2015. "Central bank operating frameworks and collateral markets," CGFS Papers, Bank for International Settlements, number 53, July.
    5. Cetorelli, Nicola, 2014. "Hybrid intermediaries," Staff Reports 705, Federal Reserve Bank of New York.

    More about this item

    Keywords

    dealer banks; financing; financial crises;

    JEL classification:

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

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