Matching Collateral Supply and Financing Demands in Dealer Banks

27 Pages Posted: 10 Apr 2014

See all articles by Adam Kirk

Adam Kirk

Federal Reserve Banks - Federal Reserve Bank of New York

James McAndrews

Wharton Financial Institutions Center

Parinitha Sastry

Federal Reserve Banks - Federal Reserve Bank of New York

Phillip Weed

Federal Reserve Banks - Federal Reserve Bank of New York

Date Written: March 31, 2014

Abstract

The failure and near-collapse of some of the largest dealer banks on Wall Street in 2008 highlighted the profound complexity of the industry. Dealer banks are financial intermediaries that make markets for many securities and derivatives. Like standard banks, funding for a loan made by a dealer bank may come from the bank’s own equity or from external sources, such as depositors or creditors. Unlike standard banks, however, dealer banks rely heavily upon collateralized borrowing and lending, which give rise to “internal” sources of financing. This article provides a descriptive and analytical perspective of dealer banks and their sources of financing, both internal and external. The authors conclude that “internal” sources of financing, relative to external sources of financing, yield high levels of efficiency in normal times, but can experience significant and abrupt reductions in stressful times. Their results suggest that accounting netting for collateralized transactions may not reflect a true netting of economic exposures, and that a prudent risk management framework should acknowledge the risks inherent in collateralized finance.

Keywords: dealer banks, collateral

JEL Classification: G00, G20, G32

Suggested Citation

Kirk, Adam and McAndrews, James and Sastry, Parinitha and Weed, Phillip, Matching Collateral Supply and Financing Demands in Dealer Banks (March 31, 2014). Economic Policy Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2422000

Adam Kirk

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

James McAndrews (Contact Author)

Wharton Financial Institutions Center ( email )

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

Parinitha Sastry

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Phillip Weed

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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

Paper statistics

Downloads
114
Abstract Views
861
rank
288,455
PlumX Metrics