What’s Your WAM? Taking Stock of Dealers’ Funding Durability
One of the lessons from the recent financial crisis is the need for securities dealers to have durable sources of funding. As evidenced by the demise of Bear Stearns and Lehman Brothers, during times of stress, cash lenders may pull away from firms or funding markets more broadly. Lengthening the tenor of secured funding is one way for a dealer to mitigate the risk of losing funding when market conditions are strained. In this post, we use clearing bank tri-party repo data to examine the degree to which dealers are lengthening the maturities of their sources of funding. (Aggregate statistics using these data are available here.) We focus on less liquid securities because it is for these assets that the durability of funding matters the most. We find substantial progress overall, with the weighted-average maturity (WAM) of funding of the less liquid securities more than doubling from January 2011 to May 2014. Nevertheless, there is currently a wide dispersion in dealer-level WAM, raising questions as to whether all dealers have enough durability in their funding of risk assets.
Background on Tri-Party Repos
Although dealers can obtain funding in the money markets through a range of mechanisms, the repurchase agreement (repo) is a particularly popular tool. Repos are essentially collateralized loans, although they are treated differently in bankruptcy cases. Furthermore, many dealers use a particular type of repo, called tri-party repo, to raise secured funds (see this staff report for a description of tri-party repo), so studying the maturity of tri-party repo trades should provide us with a representative view into the durability of dealers’ funding....MORE
