Sources of Funding in a Crisis: Evidence from Investment Banks
48 Pages Posted: 21 Mar 2013 Last revised: 22 Dec 2017
Date Written: December 21, 2017
We evaluate changes in investment bank balance sheets during financial crises to determine how these firms respond to funding shocks. Most investment banks maintain funding levels during these downturns, suggesting that liquidity shocks are not a trigger for their financial troubles. Among the banks that do face funding shortfalls, we find evidence from Level 3 assets that the decline in debt financing arises from concerns about default risk and uncertainty regarding losses on previous investments. Rather than selling toxic assets at fire sale prices in response to funding declines, investment banks more often rely on cherry picking of assets and, more recently, deposits.
Keywords: Liquidity shocks, investment banks, funding shocks, credit risk, fire sales, financial crisis, financial constraints, Level 3 assets
JEL Classification: G21, G24, G28, G32, G33, E44, E58, E61
Suggested Citation: Suggested Citation