大浩浩的笔记课堂——FRM考试学习笔记125

Topic 54 The Failure Mechanics of Dealer Banks

1.Functions of dealer banks:

⑴definition:

Dealer banks are entities that purchase and sell government or agency securities.

⑵functions:

What large dealer banks do:

①securities dealing,underwriting,and trading

②over-the-counter(OTC) derivatives

③prime brokerage and asset management

④off-balance-sheet financing

⑶management:

The diseconomies of scope in risk management:

The executive management and board of directors did not fully understand or control the risk taking activities.

2.Failure mechanisms for dealer banks:

⑴the flight of short-term  creditors:

e.g.the refusal of repurchase agreement creditors to renew their positions

⑵the flight of prime brokerage clients

⑶when derivatives counterparties duck for cover:

e.g.a counterparty´s request for a novation through another dealer bank

·特别注意！

·The mitigating solution is "central clearing counterparty".

⑷loss of cash settlement privileges

3.liquidity crisis:

⑴liquidity crisis acceleration:

A liquidity crisis is accelerated when prime broker clients or counterparties in the OTC derivatives or repo markets question the solvency of a dealer bank and desire to exit their positions or reduce their exposures with the dealer bank.

⑵A dealer bank can mitigate the risk of a loss of liquidity:

①establishing lines of bank credit

②dedicating a buffer stock of cash and liquid securities

③laddering the maturities of its liabilities

④dealer banks may have access to secured financing from central bank facilities

⑶Liquidity crisis at a dealer bank and a traditional bank run:

①the similarity:

A.in a liquidity crisis,counterparties retreat

B.in a bank run,depositors withdraw their cash

②the differences:

A.the linkages via counterparty chains

B.dealer banks have no default insurance

C.too big to fail

4.Policy responses:

⑴problems:

insolvency,illiquidity,short-term tri-party repos

⑵regulatory/instruments:

①higher capital requirements,new supervisory councils,special powers

②central banks(lender-of-last-resort)

③tri-party repo "utility"

④central bank insurance of tri-party repo transactions

⑤central clearing counterparties

⑥debt,that contigent on stipulated distress triggers,convert to equity

⑦distress-contingent convertible debt

·特别注意！

·U.S. Treasury Department´s 2008 Troubled Asset Relief Program(TARP):

policy objectives:

*To mitigate the effect of adverse selection.

*To provide below-market financing notes for bidders of "toxic" assets.

*To absorb losses beyond a pre-specified level.

·The creation of emergency banks in the form of tri-party repo utilities and clearing banks are policy proposals to mitigate firm specific and systematic liquidity risk in the OTC derivatives and repo markets.

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