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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 7: Concluding observations

José Gabilondo


This book promised a contemporary approach to understanding the funding dynamics of its protagonist – the bank – and trends in its regulation. Rather than suggest how bank failure may be reduced (a worthy goal but not mine here), this book has laid out a framework for analyzing the internal funding structure of a bank and appreciating its points of contact with external financing markets. In concluding, let me briefly recapitulate the main points.First, bank funding should be seen as an organic notion that captures the financial consequences to the bank of acting as an intermediary. Historically, these activities revolved around the bank’s conversion of demand deposits into longer-term assets such as fixed-rate mortgages. Today, the bank’s intermediation is more complex, in part because of the bank’s involvement in a credit market organized around the originate-to-distribute model. The notion is a funding relevancy argument that links the bank’s internal financial structure to its role as an intermediary and its place in the liquidity value chain. In doing so, it also points to a concrete set of institutions and practices – how firms finance and refinance their short-term position, contingent liabilities, collateral markets – that help to unpack systemic risk and financial stability, two important post-crisis mantras that remain fuzzy. Both ideas will require regulators, academics, and lawmakers to better map the evolving patterns of funds flow in the credit market.The funding mechanism integrates the bank’s funding liquidity and its capacity for loss absorption. Funding liquidity refers to the bank’s ongoing ability to successfully meet...

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