Before the era of large central bank balance sheets, banks relied on incoming payments to fund outgoing payments in order to conserve scarce liquidity. Even in the era of large central bank balance sheets, rather than funding payments with abundant reserve balances, we show that outgoing...

Corporate credit lines are drawn more heavily when funding markets are more stressed. This covariance elevates expected bank funding costs. We show that credit supply is dampened by the associated debt-overhang cost to bank shareholders. Until 2022, this impact was reduced by linking the...

This submission discusses implications for the quality and safety of financial markets of proposed rules implementing the market-making provisions of section 13 of the Bank Holding Company Act, commonly known as the “Volcker Rule.” The proposed rules1 have been described by the Office of the...

I explain the key failure mechanics of large dealer banks, and some policy implications. This is not a review of the Financial crisis of 2007-2009. Systemic risk is considered only in passing. Both the Financial crisis and the systemic importance of large dealer banks are nevertheless obvious...

This note discusses the case for exempting foreign exchange derivatives from recent regulatory requirements for over-the-counter derivatives, including clearing, trade competition, and minimum collateral requirements. My conclusion is that the arguments that have been made for such an exemption...

Post-crisis capital regulations and new failure-resolution rules increased the funding costs that are borne by bank shareholders, and thus the cost to buy-side firms for access to space on the balance sheets of large banks. A policy implication is the encouragement of market infrastructure and...

Biographical note: DuffieDarrell: Darrell Duffie is the Dean Witter Distinguished Professor of Finance at Stanford University's Graduate School of Business. His books include "How Big Banks Fail and What to Do about It" and "Dynamic Asset Pricing Theory" (both Princeton).