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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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Contents

José Gabilondo

List of figures
Preface
1.  Why bank funding?
A.  Why the federal government imposes prudential requirements
B.  Bankness
C.  A funding perspective
D.  The plan of this book
PART I    THE BANK FUNDING MODEL
2.  The wages of intermediation
A.  Funding risks
1.  Financial mismatches between assets, liabilities, payables, and receivables
2.  Internalizing funding contingencies
3.  The money position
B.  Treasury operations and funding markets
1.  Treasury operations
2.  Liability markets
C.  Interest rates
3.  Other funding models
A.  The dealer bank – exploiting advantages in collateral
1.  Equity, fixed income, currency, and commodity business lines
2.  Lending and borrowing
B.  Insurers and defined-benefit pensions – long-term liabilities and liquid assets
1.  Insurers
2.  Pensions
C.  Passive income conduits – shifting funding liquidity risk by contract
1.  Special-purpose vehicles
2.  Investment funds
PART II   THE CRISIS AND ITS CONCEPTUAL LEGACY
4.  Funding lessons from the 2007–2008 crisis
A.  Dealer credit markets: the virtuous funding spiral
B.  Credit markets tumble: the vicious funding spiral
1.  Pricing and liquidity pathologies of securitization
2.  Business models, enterprise structure and regulatory arbitrage
3.  Overleveraging from contingent liabilities
4.  The salience of the money position
5.  Bank failure in intermediation of liquidity
C.  Determining proximate causation for financial flows
PART III  POST-CRISIS FUNDING REFORM
5.  Regulatory capital
A.  The evolution of risk-based capital
B.  The regulatory balance sheet
1.  Capital adequacy in general
2.  Asset-side adjustments
3.  Measuring loss-absorption by instrument and in the aggregate
C.  Post-crisis regulatory capital
1.  Simulating tangible equity
2.  Making risk-based capital more dynamic
3.  Linking prudential requirements to the business model
6.  Regulatory liquidity
A.  Antecedents
B.  Liquidity coverage ratio
1.  Supply
2.  Demand
3.  Applying the ratio
C.  Implications
1.  Impact on bank’s assets
2.  Impact on bank’s liability structure
3.  Pricing funding liquidity
7.  Concluding observations
Appendix: A case study
Mismatching the balance sheet
How funding structure adjusts dynamically
Daily adjustments in the money position
Medium term adjustments
Index