As a result, there is a clear role for institutions – either banks or shadow banks – to issue liabilities that are shorter-term, liquid and safe while holding longer-maturity, less liquid and/or risky assets. At the same time, this role brings with it intrinsic risks, as seen by bank runs and failures throughout the history of banking.
Such risks are also illustrated by the implosion of some shadow banking activities – such as the collapse of asset-backed commercial paper and runs on repos and MMFs – during the global financial crisis. So how do you establish confidence that liabilities are safe and liquid? Banks have a number of features that help them establish confidence.