The Fragility of Short-Term Secured Funding Markets

Antoine Martin, David Skeie and Ernst-Ludwig von Thadden

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: This paper develops an infinite-horizon 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 depend on the borrower’s (endogenous) balance sheet and on (exogenous) fundamentals. 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. The theory has policy implications for prudential regulation and lender-of-last-resort interventions.

Keywords: Investment banking; securities dealers; repurchase agreements; runs; financial fragility; collateral; systemic risk. (search for similar items in EconPapers)
JEL-codes: E44 E58 G24 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-ban and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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https://epub.ub.uni-muenchen.de/17415/1/449.pdf (application/pdf)

Related works:
Journal Article: The fragility of short-term secured funding markets (2014)
Working Paper: The fragility of short-term secured funding markets (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:trf:wpaper:449

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