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Bank Funding, Liquidity, and Capital Adequacy

A Law and Finance Approach

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.
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Chapter 3: Other funding models

José Gabilondo


This chapter examines the funding of three non-bank intermediaries active in the credit market: dealer banks, insurers and passive investment vehicles. Each of these regulatory silos has a distinctive funding model. Dealer banks active in securities markets as brokers and dealers acquire a large inventory of assets, typically used as collateral for short-term loans that are rolled-over at maturity. This form of funding inventory also creates a financial mismatch in term, although dealer banks tend to otherwise maintain a rough match between their assets and liabilities. The funding practices of insurers and pensions leave them with a converse mismatch: current inflows of premiums and contributions create liquid assets, while the entity’s promises to provide benefits create long-term liabilities. Passive vehicles like asset managers and special-purpose entities pool funds for investment while shifting liquidity risk to their investors or to contractual counterparties.

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