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New York Fed – Research Series Examines Stability of Funding Models

“The Federal Reserve Bank of New York [on February 7, 2014] released a series of research reports on “funding models,” or arrangements for financial intermediation.  The three-part Economic Policy Review series aims to provide a comprehensive overview of the structure and stability of different funding models, as well as an in-depth examination of factors affecting the fragility of these arrangements.   The series begins with a paper reviewing the economics literature on the stability of banks and financial intermediaries, including a summary of intermediaries’ role as liquidity provider and the inherent fragility associated with this function.  The first report also examines factors that amplify or mitigate fragility of financial intermediaries and funding models. The second report presents case studies of several major financial markets and intermediaries that experienced significant distress during the crisis.  For each case, the author discusses the size and 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.  In the final paper, the authors present an analytical framework to evaluate how the characteristics of a funding model affect its ability to survive stress events.  The authors then apply the framework to current policy issues, including the effects of liquidity regulation, discount window policies, and approaches to reforming money market mutual funds, to help evaluate how policy options may affect financial stability. The three reports that compose the series are as follows:

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