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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 6: Regulatory liquidity

José Gabilondo


Regulators had long urged banks to maintain contingency funding plans, but binding minimum standards on the bank’s funding liquidity emerged only as a result of the 2007–2008 crisis. Styled as a liquidity coverage ratio, it seeks to ensure that the bank has adequate liquidity to survive a 30-day funding crisis. The ratio does this through procedures to evaluate the liquidity of assets, to estimate the bank’s inflows, and to measure the bank’s total funding needs during the 30-day period. After breaking out each of the ratio’s major parts, the chapter makes some tentative observations about how the ratio may impact banks and their funding markets, including the development of better techniques for pricing and tracking the use of liquidity within an entity.

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