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Bank Funding Structures and Risk

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Author Info

  • Pablo Federico
  • Francisco F. Vázquez

Abstract

This paper analyzes the evolution of bank funding structures in the run up to the global financial crisis and studies the implications for financial stability, exploiting a bank-level dataset that covers about 11,000 banks in the U.S. and Europe during 2001?09. The results show that banks with weaker structural liquidity and higher leverage in the pre-crisis period were more likely to fail afterward. The likelihood of bank failure also increases with bank risk-taking. In the cross-section, the smaller domestically-oriented banks were relatively more vulnerable to liquidity risk, while the large cross-border banks were more susceptible to solvency risk due to excessive leverage. The results support the proposed Basel III regulations on structural liquidity and leverage, but suggest that emphasis should be placed on the latter, particularly for the systemically-important institutions. Macroeconomic and monetary conditions are also shown to be related with the likelihood of bank failure, providing a case for the introduction of a macro-prudential approach to banking regulation.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/29.

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Length: 33
Date of creation: 01 Jan 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/29

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Related research

Keywords: Financial crisis; Bankruptcy; Banks; Global Financial Crisis 2008-2009; Risk management; pre-crisis; bank failure; bank liquidity; global financial crisis; banking; bank capital; deposit insurance; banking crises; bank risk; bank balance sheets; bank runs; bank of international settlements; bank risk-taking; financial crises; bank assets; bank funding; financial strength; bank regulation; bank insolvency; banking regulation; bank failures; bank liabilities; bank balance sheet; bank stock; bank activity; tier 1 capital; banking activities; bank fragility; bank size; low liquidity; bank governance; return on assets; bank performance; investment banking; bank insolvency frameworks; resolution of banking crises; systemic banking crises;

This paper has been announced in the following NEP Reports:

References

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  1. Huang, Rocco & Ratnovski, Lev, 2010. "The dark side of bank wholesale funding," Working Paper Series 1223, European Central Bank.
  2. Rocco Huang & Lev Ratnovski, 2009. "Why Are Canadian Banks More Resilient?," IMF Working Papers 09/152, International Monetary Fund.
  3. Pierluigi Bologna, 2011. "Is there a Role for Funding in Explaining Recent U.S. Banks' Failures?," IMF Working Papers 11/180, International Monetary Fund.
  4. Luc Laeven & Fabian Valencia, 2010. "Resolution of Banking Crises," IMF Working Papers 10/146, International Monetary Fund.
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Cited by:
  1. Tümer Kapan & Camelia Minoiu, 2013. "Balance Sheet Strength and Bank Lending During the Global Financial Crisis," IMF Working Papers 13/102, International Monetary Fund.
  2. Adrian Van Rixtel & Gabriele Gasperini, 2013. "Financial crises and bank funding: recent experience in the euro area," BIS Working Papers 406, Bank for International Settlements.
  3. Fungácová, Zuzana & Turk Ariss, Rima & Weill, Laurent, 2013. "Does excessive liquidity creation trigger bank failures?," BOFIT Discussion Papers 2/2013, Bank of Finland, Institute for Economies in Transition.
  4. Antonio Scalia & Sergio Longoni & Tiziana Rosolin, 2013. "The Net Stable Funding Ratio and banks’ participation in monetary policy operations: some evidence for the euro area," Questioni di Economia e Finanza (Occasional Papers) 195, Bank of Italy, Economic Research and International Relations Area.
  5. Casselmann, Farina, 2013. "Financial services regulation in the wake of the crisis: The Capital Requirements Directive IV and the Capital Requirements Regulation," IPE Working Papers 18/2013, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
  6. Dirk Mevis, 2012. "The Determinants of Short Term Funding in Luxembourgish Banks," BCL working papers 80, Central Bank of Luxembourg.

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