Bank Rollover Risk and Liquidity Supply Regimes

The maturity mismatch between their short-term financing and long-term lending exposes banks to the risk of rolling over their funding. Such a rollover risk is sufficient on its own to cause a panic at the bank level and have ripple effects on the banking system as a whole. We propose a new indicator that helps central banks monitor rollover risk and thus design liquidity support operations when needed. Building on forward rates, our rollover risk indicator (RRI) captures the way banks price the risk of not being able to obtain funding at the horizon of specific interest rate derivatives. We show that our RRI has a better predictive power for economic growth and bank lending than usual bank credit spreads. In addition, our indicator helps to contrast three liquidity regimes (crisis, moderate, and abundant), which coincide with the levels of excess liquidity supplied by central banks.