Bank Funding, Liquidity, and Capital Adequacy

Bank Funding, Liquidity, and Capital Adequacy

A Law and Finance Approach

Elgar Financial Law series

José Gabilondo

Focusing primarily on the banking system in the United States, this book offers an innovative framework that integrates a depository bank’s liquidity and its capital adequacy into a unified notion of funding that helps to explain how the 2007–2008 crisis unfolded, why central banks succeeded in resolving the crisis, and how the conceptual legacy of the crisis and its resolution led to lasting changes in bank funding regulation, including new objective requirements for bank liquidity. To provide a comparative context, the book also examines the funding models of non-bank intermediaries like dealer banks and insurers.

Chapter 2: The wages of intermediation

José Gabilondo

Subjects: law - academic, commercial law, corporate law and governance, finance and banking law, regulation and governance

Abstract

What the bank does as a financial intermediary determines its funding dynamics. These activities include extending credit outright, providing payment services, and promising to provide funds in the future at the election of the borrower. This chapter analyzes how funding these activities leaves the bank’s asset-liability structure vulnerable to financial instability, in particular in its short-term liquidity position. The bank’s treasury function can profitably manage these financial risks because of its unrivaled access to liability funding markets. Also, the federal government stands ready to supplement these private sources with a variety of specialized funds available only to banks.

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