Market Liquidity and Funding Liquidity＊

Brunnermeier, Markus K.; Pedersen, Lasse Heje

doi:10.1017/cbo9780511844393.014

Cited by 263 publications

(381 citation statements)

References 51 publications

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“…Given our findings on bank capital and securities trading, our results are consistent with models of financial intermediation where the capital level of banks affects asset demand (Xiong, 2001;Gromb and Vayanos, 2002;Brunnermeier and Pedersen, 2009;Adrian and Shin, 2010;He and Krishnamurthy, 2013;Brunnermeier and Sannikov, 2014).…”

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confidence: 85%

Securities Trading by Banks and Credit Supply: Micro-Evidence

et al. 2015

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Reproduction permitted only if source is stated.ISBN 978-3-95729-1 -(Printversion) Non-technical summary Research questionThe role of securities trading by banks has assumed significant importance in the modern financial system. Commercial banks today hold a significant amount of securities in their asset portfolio.In the aftermath of the recent financial crisis, there is considerable debate both in academic and policy circles about the implications of security trading by banks' for credit supply and securities markets. A recurrent argument has been that securities trading activities by banks in the crisis have led to a reduction in credit supply. Moreover, there have been several policy initiatives to impose some restrictions on banks' trading activities as there are claims that weak banks take excessive risk through securities trading (Volcker rule in USA, the Liikanen Report in the European Union and the Vickers Report in the UK).However, empirical analysis is scant due to the lack of comprehensive micro datasets. ContributionIn this paper, we empirically analyze securities trading by banks, and the associated spillovers to the supply of credit to the real sector. We use the German securities' register that contains information on investments made by German banks at the security level as well as the German credit register with information on the credit given by German banks to each firm. The main testable hypothesis, which we examine is that banks with trading expertise will increase their investments in securities during the crisis, especially in those securities that had a (larger) drop in price, to profit from the trading opportunities, thereby withdrawing funds from lending. ResultsWe find that, during the crisis, banks with trading expertise increase their overall investments in securities, especially in those that had a larger price drop. The quantitative effects are largest for trading banks with higher capital and in securities with lower rating and longer maturity. In fact, there are no differential effects for triple-A securities. Moreover, banks with trading expertise reduce their overall supply of credit in crisis times -i.e., for the same borrower at the same time, trading banks reduce lending relative to other banks. The credit reduction is stronger for trading banks with higher capital and is binding at the firm level. All these differential effects for trading banks are not present outside the crisis period. The use of detailed micro data allows us to control for a number of characteristics that deal with several other interpretations, which makes our results robust. Our results suggest that during a crisis, security-trading activities can crowd out lending. However, at the same time, we also find that banks buy securities that have a larger drop in price, especially in long-term and low rated securities, in turn acting as risk absorbers. Nichttechnische Zusammenfassung Forschungsfrage AbstractWe analyze securities trading by banks and the associated spillovers to the supply of credit. Empir...

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confidence: 85%

Securities Trading by Banks and Credit Supply: Micro-Evidence

et al. 2015

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“…5 Given the equivalence established in the theorem above, in most of the paper we will consider the notion that turns out to be more convenient, depending on the issue -that one of equilibrium with intermediaries or that of ArrowDebreu equilibrium with limited pledgeability.…”

Section: Equivalence Of Arrow-debreu and Financial Market Equilibriummentioning

confidence: 99%

Dynamic Competitive Economies with Complete Markets and Collateral Constraints

Gottardi

Kübler

2015

Review of Economic Studies

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In this article we examine the competitive equilibria of a dynamic stochastic economy with complete markets and collateral constraints. We show that, provided the sets of asset pay-offs and of collateral levels are sufficiently rich, the equilibrium allocations with sequential trades and collateral constraints are equivalent to those obtained in Arrow-Debreu markets subject to a series of limited pledgeability constraints. We provide both necessary and sufficient conditions for equilibria to be Pareto efficient and show that when collateral is scarce equilibria are not only Pareto inefficient but also often constrained inefficient, in the sense that imposing tighter borrowing restrictions can make everybody in the economy better off. We derive sufficient conditions for the existence of Markov equilibria and, for the case of two agents, for the existence of equilibria that have finite support. These equilibria can be computed with arbitrary accuracy and the model is very tractable. Abstract In this paper we examine the competitive equilibria of a dynamic stochastic economy with complete markets and collateral constraints. We show that, provided the sets of asset payoffs and of collateral levels are sufficiently rich, the equilibrium allocations with sequential trades and collateral constraints are equivalent to those obtained in Arrow-Debreu markets subject to a series of limited pledgeability constraints.We provide both necessary and sufficient conditions for equilibria to be Pareto efficient and show that when collateral is scarce equilibria are not only Pareto inefficient but also often constrained inefficient, in the sense that imposing tighter borrowing restrictions can make everybody in the economy better off.We derive sufficient conditions for the existence of Markov equilibria and, for the case of two agents, for the existence of equilibria that have finite support. These equilibria can be computed with arbitrary accuracy and the model is very tractable. * We thank seminar participants at various universities and conferences and in particular Arpad Abraham,

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“…After June 2007, the market for ABS shut down, because most market participants did not have enough information to price and trade these securities. This market freeze created an enormous overhang of illiquid assets on banks' balance sheets, which in turn resulted in a credit crunch (Brunnermeier and Pedersen 2009). However, the links between securitization, transparency, and market liquidity are less than obvious. If the opaqueness of the securitization process affects the liquidity of ABS, why should ABS issuers choose opaqueness over transparency?…”

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confidence: 99%