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The fragility of short-term secured funding markets

  • Antoine Martin
  • David Skeie
  • Ernst-Ludwig von Thadden

This paper develops a model of financial institutions that borrow short term and invest in long-term assets that can be traded in frictionless markets. Because these financial intermediaries perform maturity transformation, they are subject to potential runs. We derive distinct liquidity, collateral, and asset liquidation constraints, which determine whether a run can occur as a result of changing market expectations. We show that the extent to which borrowers can ward off an individual run depends on whether it has sufficient liquidity, collateral, and asset liquidation capacity. These determinants are endogenous and depend on the borrower's balance sheet, in terms of asset market exposure and leverage, and on fundamentals, such as productivity and size. Moreover, systemic runs are possible if shocks to the valuation of collateral held by outside investors are sufficiently strong and uniform, and if the system as a whole is exposed to high short-term funding risk.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 630.

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Date of creation: 2013
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Handle: RePEc:fip:fednsr:630
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  1. Gary B. Gorton & Andrew Metrick, 2009. "Securitized Banking and the Run on Repo," NBER Working Papers 15223, National Bureau of Economic Research, Inc.
  2. Antoine Martin & David Skeie & Ernst-Ludig von Thadden, 2011. "Repo Runs," FMG Discussion Papers dp687, Financial Markets Group.
  3. Viral V. Acharya & Philipp Schnabl & Gustavo Suarez, 2010. "Securitization without risk transfer," NBER Working Papers 15730, National Bureau of Economic Research, Inc.
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  13. Nicola Gennaioli & Andrei Shleifer & Robert Vishny, 2010. "Neglected Risks, Financial Innovation, and Financial Fragility," Working Papers 502, Barcelona Graduate School of Economics.
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  16. Adam Ashcraft & James Mcandrews & David Skeie, 2011. "Precautionary Reserves and the Interbank Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 311-348, October.
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  19. Allen, F. & Gale, D., 1991. "Limited Market Participation and Volatility of Asset Prices," Weiss Center Working Papers 2-92, Wharton School - Weiss Center for International Financial Research.
  20. Patrick Bolton & Tano Santos & Jose A. Scheinkman, 2009. "Outside and Inside Liquidity," NBER Working Papers 14867, National Bureau of Economic Research, Inc.
  21. David R. Skeie, 2008. "Banking with nominal deposits and inside money," Staff Reports 242, Federal Reserve Bank of New York.
  22. 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.
  23. Franklin Allen & Douglas Gale, 1976. "Optimal Financial Crises," Center for Financial Institutions Working Papers 97-01, Wharton School Center for Financial Institutions, University of Pennsylvania.
  24. Pozsar, Zoltan & Adrian, Tobias & Ashcraft, Adam B. & Boesky, Hayley, 2013. "Shadow banking," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 1-16.
    • Zoltan Pozsar & Tobias Adrian & Adam Ashcraft & Hayley Boesky, 2010. "Shadow banking," Staff Reports 458, Federal Reserve Bank of New York.
  25. Anatoli Segura & Javier Suarez, 2011. "Dynamic Maturity Transforation," Working Papers wp2011_1105, CEMFI.
  26. Acharya, Viral V & Gale, Douglas M & Yorulmazer, Tanju, 2009. "Rollover Risk and Market Freezes," CEPR Discussion Papers 7122, C.E.P.R. Discussion Papers.
  27. Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
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  29. Peter M. DeMarzo, 2005. "The Pooling and Tranching of Securities: A Model of Informed Intermediation," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 1-35.
  30. Ernst-Ludwig von Thadden & Erik Berglöf & Gérard Roland, 2010. "The Design of Corporate Debt Structure and Bankruptcy," Review of Financial Studies, Society for Financial Studies, vol. 23(7), pages 2648-2679, July.
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