Funding liquidity risk: definition and measurement
AbstractFunding liquidity risk has played a key role in all historical banking crises. Nevertheless, a measure based on publicly available data remains so far elusive. We address this gap by showing that aggressive bidding at central bank auctions reveals funding liquidity risk. We can extract an insurance premium from banks' bids which we propose as measure of funding liquidity risk. Using a unique data set consisting of all bids in the main refinancing operation auctions conducted at the ECB between June 2005 and October 2008 we find that funding liquidity risk is typically stable and low, with occasional spikes, especially around key events during the recent crisis. We also document downward spirals between funding liquidity risk and market liquidity. As measurement without clear definitions is impossible, we initially provide definitions of funding liquidity and funding liquidity risk.
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Bibliographic InfoPaper provided by Bank for International Settlements in its series BIS Working Papers with number 316.
Length: 35 pages
Date of creation: Jul 2010
Date of revision:
funding liquidity; liquidity risk; bidding behavior; central bank auctions; interbank markets;
Other versions of this item:
- Drehmann, Mathias & Nikolaou, Kleopatra, 2009. "Funding liquidity risk: definition and measurement," Working Paper Series 1024, European Central Bank.
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
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