Capital-and-Liquidity Marathon Model
Build crisis resilience with both financial strength and dependable funding
- Difficulty
- Advanced
- Time to result
- ~ongoing to results
- Steps
- 5
- Confidence
- 96%
The model compares a financial institution to a marathon runner. Capital is the runner’s physical conditioning: it determines how much loss and strain the institution can absorb. Liquidity is oxygen: it must remain available throughout the race, especially when markets are distressed. An institution can therefore appear healthy by capital measures yet fail rapidly if short-term liabilities fund long-duration assets and refinancing disappears. Assessment must examine capital, liquidity, and asset-liability duration together under crisis conditions rather than extrapolating from normal markets. The output is a balance sheet with sufficient loss-absorbing capacity, reliable funding, matched durations, and contingency options. This combined preparation allows the institution to survive shocks and potentially support customers or acquire assets while weaker competitors are forced to retreat.
Origin
Braunstein used the marathon analogy when reflecting on Lehman Brothers, AIG, and JP Morgan’s experience during the global financial crisis. Extracted from Masters in Business.
Core principles
- 01Capital and liquidity protect against different failure modes
- 02Strong capital cannot offset the sudden loss of funding
- 03Asset and liability durations must remain compatible
- 04Crisis conditions invalidate normal-times funding assumptions
- 05Resilience must be built before liquidity disappears
How to run it
- 1
Assess financial conditioning
Measure whether the capital base can absorb severe credit, market, and operational losses without making the institution insolvent.
Pro tip Test conditions materially worse than the recent historical range.
Watch out Regulatory minimums are not necessarily sufficient crisis buffers.
- 2
Map funding oxygen
Identify every important source of liquidity, its contractual maturity, and the conditions under which counterparties may withdraw it.
Pro tip Separate legally committed funding from funding that is merely customary.
Watch out Normal-market availability may disappear immediately during panic.
- 3
Match durations
Compare the timing of asset cash flows with liability maturities and isolate gaps that require repeated refinancing.
Pro tip Pay special attention to illiquid assets financed with runnable short-term liabilities.
Watch out Accounting solvency does not prevent a funding failure.
- 4
Stress both dimensions together
Model simultaneous losses, collateral calls, deposit or counterparty flight, and frozen funding markets.
Pro tip Include second-order effects caused by failures elsewhere in the system.
Watch out Separate capital and liquidity tests can miss reinforcing risks.
- 5
Pre-position crisis options
Hold liquidity reserves and prepare funding, asset-sale, and operational responses that can be executed before confidence collapses.
Pro tip Assign decision owners and activation thresholds in advance.
Watch out A plan requiring calm markets is not a crisis plan.
In the wild
Braunstein said JP Morgan entered the financial crisis with both a fortress balance sheet and substantial liquidity. That capacity allowed it to withstand disruption, acquire Bear Stearns and Washington Mutual, and participate in attempts to stabilize other institutions.
→ The bank survived the crisis from a position of relative strength and was able to pursue systemically important transactions.
Lehman’s bankruptcy intensified market stress and accelerated problems at AIG and other firms. Institutions that believed their capital was sufficient still faced danger when the system deprived them of liquidity at the moment it was most needed.
→ The crisis demonstrated that capital adequacy without dependable liquidity is incomplete protection.
Common mistakes
Treating capital as sufficient
A solvent-looking institution can fail when it cannot meet immediate obligations or refinance maturing liabilities.
Assuming normal liquidity persists
Funding channels that appear dependable in ordinary conditions may close during a systemic crisis.
Ignoring duration mismatch
Financing long-lived assets with short-lived liabilities creates recurring dependence on market confidence.
Is it for you?
Best for
It is best for banks, lenders, treasury teams, and investors assessing balance-sheet resilience.
Not ideal for
It is not ideal as a complete risk framework for businesses whose primary threats are unrelated to financing or liquidity.
From the transcript
“they also need liquidity and matching the duration of your assets and liabilities is critically important.”
“for a marathon runner, it's the oxygen they take in in the race.”
“if you aren't prepared for both, you know you're not going to be successful in the race.”
From the episode
Doug Braunstein on Investment Banking (Podcast)
Doug Braunstein