Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/93607
Authors: 
Martin, Antoine
Skeie, David
von Thadden, Ernst-Ludwig
Year of Publication: 
2013
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 630
Abstract: 
This paper develops a model of financial institutions that borrow short term and invest in longterm assets that can be traded in frictionless markets. Because these financial intermediaries perform maturity transformation, they are subject to potential runs. We derive distinct liquidity, collateral, and asset liquidation constraints, which determine whether a run can occur as a result of changing market expectations. We show that the extent to which borrowers can ward off an individual run depends on whether it has sufficient liquidity, collateral, and asset liquidation capacity. These determinants are endogenous and depend on the borrower's balance sheet, in terms of asset market exposure and leverage, and on fundamentals, such as productivity and size. Moreover, systemic runs are possible if shocks to the valuation of collateral held by outside investors are sufficiently strong and uniform, and if the system as a whole is exposed to high short-term funding risk.
Subjects: 
investment banking
securities dealers
repurchase agreements
runs
financial fragility
collateral
systemic risk
JEL: 
E44
E58
G24
Document Type: 
Working Paper

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