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Short-term wholesale funding and systemic risk: A global CoVaR approach

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  • López-Espinosa, Germán
  • Moreno, Antonio
  • Rubia, Antonio
  • Valderrama, Laura

Abstract

We use the CoVaR approach to identify the main factors behind systemic risk in a set of large international banks. We find that short-term wholesale funding is a key determinant in triggering systemic risk episodes. In contrast, we find weaker evidence that either size or leverage contributes to systemic risk within the class of large international banks. We also show that asymmetries based on the sign of bank returns play an important role in capturing the sensitivity of system-wide risk to individual bank returns. Since short-term wholesale funding emerges as the most relevant systemic factor, our results support the Basel Committee’s proposal to introduce a net stable funding ratio, penalizing excessive exposure to liquidity risk.

Suggested Citation

  • López-Espinosa, Germán & Moreno, Antonio & Rubia, Antonio & Valderrama, Laura, 2012. "Short-term wholesale funding and systemic risk: A global CoVaR approach," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3150-3162.
  • Handle: RePEc:eee:jbfina:v:36:y:2012:i:12:p:3150-3162
    DOI: 10.1016/j.jbankfin.2012.04.020
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    References listed on IDEAS

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    More about this item

    Keywords

    Systemic importance; Liquidity risk; Macroprudential regulation;

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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