Funding Illiquidity

49 Pages Posted: 11 Jan 2016 Last revised: 5 Sep 2019

See all articles by Matthias Rupprecht

Matthias Rupprecht

University of St. Gallen - School of Finance

Jan Wrampelmeyer

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute

Date Written: September 5, 2019

Abstract

We provide a theoretical model for funding liquidity that extends the literature by allowing financial institutions to raise short-term unsecured funding in addition to secured funding. We identify a new liquidity spiral, a credit limit spiral, for unsecured funding and show how it reinforces the margin and loss spiral for secured funding. Our model brings to light a dual role of margins. While higher margins reduce secured funding, they relax the funding constraint in the unsecured market ceteris paribus. We show that there is commonality and substitution effects in funding illiquidity, and discuss how central bank and regulatory policies can prevent illiquidity.

Keywords: funding liquidity, unsecured and secured funding, liquidity spirals, monetary policy, regulation

JEL Classification: E43, E58, G01, G12, G18, G21, G28

Suggested Citation

Rupprecht, Matthias and Wrampelmeyer, Jan, Funding Illiquidity (September 5, 2019). University of St.Gallen, School of Finance Research Paper No. 2016/01. Available at SSRN: https://ssrn.com/abstract=2713711 or http://dx.doi.org/10.2139/ssrn.2713711

Matthias Rupprecht

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Jan Wrampelmeyer (Contact Author)

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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