Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/93781
Authors: 
Martin, Antoine
Skeie, David
von Thadden, Ernst-Ludwig
Year of Publication: 
2013
Series/Report no.: 
SFB/TR 15 Discussion Paper 449
Abstract: 
This paper develops an infinite-horizon model of financial institutions that borrow short-term and invest in long-term 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 depend on the borrower's (endogenous) balance sheet and on (exogenous) fundamentals. 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. The theory has policy implications for prudential regulation and lender-of-last-resort interventions.
Subjects: 
Investment banking
securities dealers
repurchase agreements
runs
financial fragility
collateral
systemic risk
JEL: 
E44
E58
G24
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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