Stability of Funding Models: An Analytical Framework

19 Pages Posted: 5 Mar 2014

See all articles by Thomas M. Eisenbach

Thomas M. Eisenbach

Federal Reserve Bank of New York

Todd Keister

Rutgers, The State University of New Jersey - Department of Economics

James McAndrews

Wharton Financial Institutions Center

Tanju Yorulmazer

Koc University

Date Written: February 1, 2014

Abstract

With the recent financial crisis, many financial intermediaries experienced strains created by declining asset values and a loss of funding sources. In reviewing these stress events, one notices that some arrangements appear to have been more stable — that is, better able to withstand shocks to their asset values and/or funding sources — than others. Because the precise determinants of this stability are not well understood, gaining a better grasp of them is a critical task for market participants and policymakers as they try to design more resilient arrangements and improve financial regulation. This article uses a simple analytical framework to illustrate the determinants of a financial intermediary’s ability to survive stress events. An intermediary in the framework faces two types of risk: the value of its assets may decline and/or its short-term creditors may decide not to roll over their debt. The authors measure stability by looking at the combinations of shocks the intermediary can experience while remaining solvent. They study how stability depends on the intermediary’s balance-sheet characteristics, such as its leverage, the maturity structure of its debt, and the liquidity and riskiness of its asset portfolio. They also show how the framework can be applied to examine current policy issues, including liquidity requirements, discount window policy, and different approaches to reforming money market mutual funds.

Keywords: financial crisis, bank run, market run, maturity, wholesale funding, liquidity

JEL Classification: G01, G18, G20, G21, G23, G28

Suggested Citation

Eisenbach, Thomas M. and Keister, Todd and McAndrews, James and Yorulmazer, Tanju, Stability of Funding Models: An Analytical Framework (February 1, 2014). Economic Policy Review, Vol. 20, No. 1, 2014, Available at SSRN: https://ssrn.com/abstract=2403925

Thomas M. Eisenbach

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-6089 (Phone)

HOME PAGE: http://teisenbach.github.io/

Todd Keister

Rutgers, The State University of New Jersey - Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States

HOME PAGE: http://www.toddkeister.net/

James McAndrews

Wharton Financial Institutions Center ( email )

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States
9176090086 (Phone)
19104 (Fax)

Tanju Yorulmazer (Contact Author)

Koc University ( email )

Rumeli Feneri Yolu
Sariyer, Istanbul, 34450
Turkey

HOME PAGE: http://gsssh.ku.edu.tr/en/departments/economics/akademik-kadro/show/tyorulmazer/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
229
Abstract Views
1,508
rank
194,261
PlumX Metrics