IDEAS home Printed from
   My bibliography  Save this paper

The credit crisis and the dynamics of asset backed commercial paper programs


  • Nikolaj Schmidt



Motivated 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.

Suggested Citation

  • Nikolaj Schmidt, 2009. "The credit crisis and the dynamics of asset backed commercial paper programs," FMG Discussion Papers dp625, Financial Markets Group.
  • Handle: RePEc:fmg:fmgdps:dp625

    Download full text from publisher

    File URL:
    Download Restriction: no

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fmg:fmgdps:dp625. See general 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). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.