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Banking System Stability with respect to Funding Liquidity Risk

Author

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  • Mario HAEFELI

    (University of Zurich and Swiss Finance Institute)

Abstract

We construct unique measures which allow to discuss the financial stability of banking systems with respect to funding liquidity risk. We quantify the maximal proportional price shock a banking system can sustain without downward spiralling illiquid asset prices. It follows that an absolute and a percentage increase of liquid assets improve and severer capital requirements in times of financial distress reduce banking system stability. The model is calibrated to the Austrian banking system. The empirical analysis shows financial instability already in 2006, i.e., the stability measure proves to have a long-term forecast power in this case.

Suggested Citation

  • Mario HAEFELI, 2010. "Banking System Stability with respect to Funding Liquidity Risk," Swiss Finance Institute Research Paper Series 10-37, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1037
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    More about this item

    Keywords

    Banking; Financial Stability; Funding Liquidity Risk; Liquidity Risk; Regulation; Systemic Risk;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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