Academic journal article Federal Reserve Bank of New York Economic Policy Review

Introduction

Academic journal article Federal Reserve Bank of New York Economic Policy Review

Introduction

Article excerpt

The financial crisis of 2007-09 highlighted the fragility of many financial intermediaries and markets. As asset values declined and funding sources dried up, a significant number of commercial banks, investment banks, and money market mutual funds experienced distress, as did some market-based intermediation arrangements such as asset-backed commercial paper. Borrowing rates and haircuts reached record-high levels and some funding markets completely froze. These difficulties were severe enough to cause several institutions to fail and others to require extraordinary public support.

This special issue of the Economic Policy Review examines the stability of different "funding models" or arrangements for financial intermediation. The first of the three featured papers is a review of the economics literature on the stability of financial intermediaries, with a focus on intermediaries' funding models. The paper discusses the standard framework used in the literature to analyze the fragility associated with financial institutions that perform maturity and liquidity transformation and the potential factors that amplify or mitigate such fragility. Furthermore, it reviews developments in the financial sector that may have affected the stability of funding models.

The second paper presents case studies of several major financial markets and intermediaries that experienced significant distress during the crisis. For each case, we provide a discussion of the size and the evolution of the market, the sources of the disruptions, and the policy responses that were implemented to mitigate distress and make markets and intermediaries more liquid. We analyze the markets for auction rate securities, commercial paper, asset-backed commercial paper, and bilateral and tri-party repo, as well as credit commitments by banks, dollar funding of non-U. …

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