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Short-Term Debt and Bank Risk

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  • Du, Brian
  • Palia, Darius

Abstract

The extant literature suggests that one of the main causes of the recent financial crisis was the excessive use of short-term debt by banks. Using a large sample of banks, we find that increases in repurchase agreements (repos) were recognized by external capital markets to increase bank risk in the pre-crisis period. In the crisis, we find a negative relationship between repos and risk. We attribute this result to evidence suggesting that “good†banks were able to continue funding their repos, whereas “bad†banks had to significantly decrease their repo funding.

Suggested Citation

  • Du, Brian & Palia, Darius, 2018. "Short-Term Debt and Bank Risk," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 53(2), pages 815-835, April.
    • Handle: RePEc:cup:jfinqa:v:53:y:2018:i:02:p:815-835_00
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    Cited by:

    1. Patel, Ajay & Sorokina, Nonna & Thornton, John H., 2022. "Liquidity and bank capital structure," Journal of Financial Stability, Elsevier, vol. 62(C).
    2. Giulio Velliscig & Josanco Floreani & Maurizio Polato, 2023. "Capital and asset quality implications for bank resilience and performance in the light of NPLs’ regulation: a focus on the Texas ratio," Journal of Banking Regulation, Palgrave Macmillan, vol. 24(1), pages 66-88, March.
    3. Brian Du, 2020. "Securitized banking and interest rate sensitivity," Review of Quantitative Finance and Accounting, Springer, vol. 54(3), pages 851-876, April.
    4. Nguyen, Thanh Cong, 2023. "Wholesale funding and bank stability: The impact of economic policy uncertainty," Research in International Business and Finance, Elsevier, vol. 65(C).
    5. Nguyen, Thach Vu Hong & Ahmed, Shamim & Chevapatrakul, Thanaset & Onali, Enrico, 2020. "Do stress tests affect bank liquidity creation?," Journal of Corporate Finance, Elsevier, vol. 64(C).
    6. Balachandran, Balasingham & Williams, Barry, 2018. "Effective governance, financial markets, financial institutions & crises," Pacific-Basin Finance Journal, Elsevier, vol. 50(C), pages 1-15.

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