Bank Funding, Liquidity, and Capital Adequacy: A Law and Finance Approach

Abstract

Though seen primarily as lenders, depository banks face their own financing challenges arising from their role as intermediaries, their compliance with prudential regulation, the short-term stresses on their financial resources, and their changing position in a credit market populated with nonbank competitors. At the same time, these banks enjoy unique support from the central bank and government authorities, which stand by with stabilizing liquidity to supplement market funds. Drawing 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, one that reveals 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 about a bank’s liquidity. To provide a comparative context, the book also examines the funding models of nonbank intermediaries like dealer banks and insurers.

Keywords: bank funding, liquidity coverage ratio, Basel III, regulatory capital, banking regulation, Dodd Frank