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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 4: Funding lessons from the 2007–2008 crisis

José Gabilondo


This chapter analyzes how the 2007–2008 crisis and its resolution crystalized the notion of a liquidity value chain in funding markets. In the heyday of the originate-to-distribute model, banks gained access to new funds, investors profited from structured finance products with investment-grade ratings, retail and corporate borrowers benefited from cheap and ample credit, and securitization promoters collected fees. Beginning in 2007, this funding spiral changed direction, leaving even high-quality borrowers without access to refinancing markets. The rescue efforts of central banks and governments helped to conceptualize the crisis in terms of funding practices, business models, contingent liabilities and the money position. This conceptual legacy would influence post-crisis reforms of financial regulation.

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