This book provides a framework for understanding the credit market dynamics in the United States that led to the Global Financial Crisis, dynamics that remain relevant. The book traces the evolution of the depository bank model and alternative platforms for credit, including money markets, nonbank lenders, and capital markets. Securitization joined these platforms into an ecosystem that reversed the value formula for credit, creating markets in which loans became supply, demand depended on institutional capital seeking investment, and credit products became subject to the kind of volatility found in equity trading. Deregulation let banks join sprawling and protean financial conglomerates that subsumed regulated entities and shadow banks, a trend that continues today. When the Global Financial Crisis tested the ecosystem, its latent weaknesses became obvious, requiring rescue by central banks that became market makers of last resort. Unlike the New Deal, post-crisis regulation largely endorses the pre-crisis order and its institutional arrangements, saving the products and business models that faced extinction when the credit cycle changed in 2007. Post-crisis regulation also targets bank financial structure, subjecting it to new regulatory liquidity requirements that have become as important as bank capital requirements. Through its changing role in this ecosystem, the Federal Reserve has morphed from prudential regulator to arbiter of financial market structure, now using a more statist approach to monetary policy that relies to a greater extent on administered interest rates rather than those set by market forces.

Q. Why this book, and why now?

The Global Financial Crisis demanded a rethinking of fundamental questions about the credit system, including a closer look at how its component parts interacted with each other. A decade after the Dodd-Frank Act, it now becomes possible to discern the more lasting patterns in credit markets. To that end, this book emphasizes market structure as an intermediate perspective on institutional arrangements, something between macroeconomic modeling of the economy as a stylized unity and microstructural analysis of prices. The argument reinforces some of the major ideas that came out of this conceptual reappraisal—that liquidity intermediation and its regulation deserve more attention, that for financial intermediaries funding is often destiny, and that the modern central bank is inextricably involved in capital markets that extend far beyond depository banking.

 Q. Who should read this book?

Subject matter specialists in banking, money markets, structured finance, or capital markets will benefit from this integrated account of credit markets, which breaks out of the conceptual silos that characterize many approaches to credit intermediation. This book will also provide a more nuanced understanding of financial institutions and credit markets for financial law practitioners, sector analysts and journalists.

Q. What is the most important takeaway you hope your readers gain from this book?

The book posits a cluster of credit environments—depository banks, the Treasury market, capital markets, corporate bonds, money markets, and structured finance—that act as a loosely federated credit ecosystem, albeit an emergent and unstable one prone to periodic upheaval and self-restructuring. Today, the creation of credit and the ongoing affirmation of its value depend on the stability of this intermarket ecosystem. In this set-up, the depository bank model remains special, in no small part because of the liquidity services that it provides on behalf of its nonbank competitors, as well as the depository bank’s affiliation with the financial conglomerates that establish the real boundaries—in terms of cash flow and risk—between regulated credit and shadow banking. 

Q. How did you decide on the title and cover art?

The book’s central point is that seemingly separate credit markets form part of a single funding system, albeit one whose institutional arrangements can change in unpredictable but often patterned ways. I wanted the cover to convey a unitary structure but one whose internal elements were varied or unstable. I also love Piet Mondrian, so this image seemed ideal.

Born in Santiago de Cuba, José Gabilondo joined the College of Law after working in financial market regulation at the U.S. Department of the Treasury, the U.S. Securities and Exchange Commission, the Office of the Comptroller of the Currency, and the World Bank. He served as Associate Dean for Academic Affairs from 2009-2011. Professor Gabilondo teaches corporate finance, banking regulation, tax, and Profesión Jurídica Comparada, a Spanish-language course on foreign and comparative law. His scholarship focuses on financial markets and Cuba legal studies. He has presented at the Universities of Chicago, Buffalo, Havana, Columbia, Maryland, DePaul, Emory, Florida State, Georgetown, and Wake Forest, Universidad Nacional Autónoma de México, American University, Cuba’s Unión Nacional de Juristas, and the Instituto Tecnológico Autónomo de México. His work has appeared in the Journal of Corporation Law, Wake Forest Law Review, Catalejos, Seton Hall Law Review, UNIjuris(Cuba), Maryland Journal of Business & Technology Law, and the Wisconsin Journal of Law, Gender, and Society, among others. He is the author of Bank Funding, Liquidity, and Capital Adequacy: A Law and Finance Approach and co-author of Corporate Finance: Debt, Equity, and Derivative Markets and their Intermediaries, in the American Casebook Series. He has been a featured speaker at meetings of the Latin American Law and Economics Association, the Association for the Study of the Cuban Economy, Organización Nacional de Bufetes Colectivos (Cuba), the American Society for International Law, the American Association of Law Schools, the Georgetown University Conference on Socio-Economics, Law and Society, the American Association of University Professors, LatCrit, and the Latin American Studies Association. He is a nationally recognized commentator in the Spanish-language media on financial and economic matters.

Professor Gabilondo is currently working on a book about business models for financial intermediation.