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Connectedness and ContagionProtecting the Financial System from Panics$
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Hal S. Scott

Print publication date: 2016

Print ISBN-13: 9780262034371

Published to MIT Press Scholarship Online: January 2017

DOI: 10.7551/mitpress/9780262034371.001.0001

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Dependence of the Financial System on Short-Term Funding

Dependence of the Financial System on Short-Term Funding

Chapter:
(p.231) 20 Dependence of the Financial System on Short-Term Funding
Source:
Connectedness and Contagion
Author(s):

Hal S. Scott

Publisher:
The MIT Press
DOI:10.7551/mitpress/9780262034371.003.0020

Contagion depends critically on short-term funding, without such funding creditors cannot run. They can, however, refuse to lend more, and this was a major problem in the crisis—institutions that were dependent on short-term funding, like broker-dealers or corporate commercial paper issuers, could not get such funding. If one could design a financial system that was not critically dependent on short-term funding, the possibilities of contagion would be greatly diminished. This chapter explores how short-term funding could be sufficiently limited to control contagion to the point where the need for lender of last resort or guarantees was virtually eliminated. It concludes this is not feasible. It also considers the downside of the government replacing the private sector as supplier of short-term funding.

Keywords:   contagion, short-term funding, gross funding, financial crisis, financial institutions, lender of last resort, private sector, monetary policy

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