Funding Illiquidity

Matthias Rupprecht () and Jan Wrampelmeyer
Authors registered in the RePEc Author Service: Angelo Ranaldo

No 1601, Working Papers on Finance from University of St. Gallen, School of Finance

Abstract: We provide a theoretical model for funding liquidity that extends the literature by allowing financial institutions to raise short-term unsecured funding in addition to secured funding. We identify a new liquidity spiral, a credit limit spiral, for unsecured funding and show how it reinforces the margin and loss spiral for secured funding. Our model brings to light a dual role of margins. While higher margins reduce secured funding, they relax the funding constraint in the unsecured market ceteris paribus. We show that there is commonality and substitution effects in funding illiquidity, and discuss how central bank and regulatory policies can prevent illiqudity.

Keywords: Funding liquidity; unsecured and secured funding; liquidity spirals; monetary policy; regulation (search for similar items in EconPapers)
JEL-codes: E43 E58 G01 G12 G21 G28 (search for similar items in EconPapers)
Pages: 49pages
Date: 2016-01, Revised 2019-09
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:usg:sfwpfi:2016:01

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