Even if an intermediary’s book of securities financing transactions is perfectly matched, a reduction in its access to funding can force the firm to engage in asset fire sales or to abruptly withdraw credit from customers. The intermediary’s customers are likely to be highly leveraged and maturity transforming financial firms as well, and, therefore, may then have to engage in fire sales themselves.
The direct and indirect contagion risks are high. Thus, the long-term and short-term liquidity ratios might be refashioned so as to address directly the risks of large SFT books. Similarly, existing bank and broker-dealer risk-based capital rules do not reflect fully the financial stability risks associated with SFTs.