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The Determinants of Short Term Funding in Luxembourgish Banks

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  • Dirk Mevis

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Abstract

This paper attempts to empirically identify the determinants of Luxembourgish banks? reliance on short term funding. The emphasis lies on making the link to developments in the macroeconomic environment and the build up of systemic risk while institution-specific factors are being controlled for. The paper provides evidence for a close link between exuberant credit developments at the aggregate level and short term funding of banks. This finding supports the view that one possible channel for increasing vulnerabilities during a lending boom may run through increased reliance of banks on short term funding. When it comes to bank specific variables, bank size has an important effect on the tendency to contract short term funding. This result is in line with recent work on leverage procyclicality in the banking sector. The results also imply that currently discussed regulatory standards on the funding structure of banks could mitigate the build up of vulnerabilities.

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File URL: http://www.bcl.lu/fr/publications/cahiers_etudes/80/BCLWP080.pdf
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Bibliographic Info

Paper provided by Central Bank of Luxembourg in its series BCL working papers with number 80.

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Length: 31 pages
Date of creation: Oct 2012
Date of revision:
Handle: RePEc:bcl:bclwop:bclwp080

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Web page: http://www.bcl.lu/

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Keywords: Banks; short term funding; procyclicality;

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  1. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, Elsevier, vol. 87(1), pages 115-143, August.
  2. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
  3. Brunnermeier, Markus K & Pedersen, Lasse Heje, 2007. "Market Liquidity and Funding Liquidity," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6179, C.E.P.R. Discussion Papers.
  4. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(2), pages 211-48, April.
  5. Shin, Hyun Song, 2010. "Risk and Liquidity," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780199546367, October.
  6. Jeremy C. Stein, 2005. "Why are most Funds Open-end? Competition and the Limits of Arbitrage," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 120(1), pages 247-272, January.
  7. John Geanakoplos, 2010. "Solving the present crisis and managing the leverage cycle," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Aug, pages 101-131.
  8. Gastón Andrés Giordana & Ingmar Schumacher, 2011. "The Leverage Cycle in Luxembourg?s Banking Sector," BCL working papers, Central Bank of Luxembourg 66, Central Bank of Luxembourg.
  9. Gaston Giordana & Ingmar Schumacher, 2011. "The Impact of the Basel III Liquidity Regulations on the Bank Lending Channel: A Luxembourg case study," BCL working papers, Central Bank of Luxembourg 61, Central Bank of Luxembourg.
  10. John Geanakoplos, 2009. "The Leverage Cycle," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1715, Cowles Foundation for Research in Economics, Yale University.
  11. Diamond, Douglas W, 1991. "Debt Maturity Structure and Liquidity Risk," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 106(3), pages 709-37, August.
  12. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 23(1), pages 77-100, Winter.
  13. John Geanakoplos, 2010. "Solving the Present Crisis and Managing the Leverage Cycle," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1751, Cowles Foundation for Research in Economics, Yale University.
  14. Pablo Federico & Francisco F. Vázquez, 2012. "Bank Funding Structures and Risk," IMF Working Papers 12/29, International Monetary Fund.
  15. Flannery, Mark J, 1986. " Asymmetric Information and Risky Debt Maturity Choice," Journal of Finance, American Finance Association, American Finance Association, vol. 41(1), pages 19-37, March.
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