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The Fragility of Short-Term Secured Funding Markets

45 Pages Posted: 4 Nov 2012 Last revised: 22 Aug 2017

Antoine Martin

Federal Reserve Bank of New York - Research and Statistics

David R. Skeie

Texas A&M University - Mays Business School - Department of Finance

Ernst-Ludwig von Thadden

Universitaet Mannheim; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: September 1, 2013

Abstract

This paper develops a model of financial institutions that borrow short-term and invest into long-term assets that can be traded on 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 borrower specific fundamentals such as leverage, productivity, size, and asset market activity. Moreover, systemic runs are possible if shocks to the valuation of collateral held by outside investors are sufficiently strong and uniform.

Suggested Citation

Martin, Antoine and Skeie, David R. and von Thadden, Ernst-Ludwig, The Fragility of Short-Term Secured Funding Markets (September 1, 2013). Journal of Economic Theory 149, 2014, 15-42; FRB of New York Staff Report No. 630. Available at SSRN: https://ssrn.com/abstract=2170882 or http://dx.doi.org/10.2139/ssrn.2170882

Antoine Martin

Federal Reserve Bank of New York - Research and Statistics ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-6943 (Phone)

David R. Skeie

Texas A&M University - Mays Business School - Department of Finance ( email )

360E Wehner
College Station, TX 77843-4218
United States
949-845-1224 (Phone)
979-845-3884 (Fax)

HOME PAGE: http://mays.tamu.edu/directory/drs/

Ernst-Ludwig Von Thadden (Contact Author)

Universitaet Mannheim ( email )

Department of Economics
Mannheim, 68131
Germany

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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