What Makes a Bank Stable? A Framework for Analysis

Thomas Eisenbach and Tanju Yorulmazer

No 20140224, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: One of the major roles of banks and other financial intermediaries is to channel funds from savings into valuable projects. In doing so, banks engage in “liquidity and maturity transformation,” since they finance long-term, illiquid projects while funding themselves with short-term, liquid liabilities. By performing this important role, banks expose themselves to the risk of runs: If depositors or other short-term creditors worry about their claims, they may withdraw funds en masse and cause the bank to fail. The recent financial crisis once again highlighted the fragility associated with financial intermediaries performing the roles of maturity and liquidity transformation. This post draws upon our paper “Stability of Funding Models: An Analytical Framework” to illustrate the determinants of a financial intermediary’s ability to survive stress events.

Keywords: liquidity; wholesale funding; maturity; market run; bank run; financial crisis (search for similar items in EconPapers)
JEL-codes: G1 G2 (search for similar items in EconPapers)
Date: 2014-02-24
New Economics Papers: this item is included in nep-ban
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fednls:86927

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