Funding liquidity risk: definition and measurement
Funding liquidity risk has played a key role in all historical banking crises. Nevertheless, a measure based on publicly available data remains so far elusive. We address this gap by showing that aggressive bidding at central bank auctions reveals funding liquidity risk. We can extract an insurance premium from banks' bids which we propose as measure of funding liquidity risk. Using a unique data set consisting of all bids in the main refinancing operation auctions conducted at the ECB between June 2005 and October 2008 we find that funding liquidity risk is typically stable and low, with occasional spikes, especially around key events during the recent crisis. We also document downward spirals between funding liquidity risk and market liquidity. As measurement without clear definitions is impossible, we initially provide definitions of funding liquidity and funding liquidity risk.
|Date of creation:||Jul 2010|
|Date of revision:|
|Contact details of provider:|| Postal: Centralbahnplatz 2, CH - 4002 Basel|
Phone: (41) 61 - 280 80 80
Fax: (41) 61 - 280 91 00
Web page: http://www.bis.org/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Pástor, Luboš & Stambaugh, Robert F., 2002.
"Liquidity Risk and Expected Stock Returns,"
CEPR Discussion Papers
3494, C.E.P.R. Discussion Papers.
- Luboš Pástor & Robert F. Stambaugh, . "Liquidity Risk and Expected Stock Returns," CRSP working papers 531, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Lubos Pastor & Robert F. Stambaugh, 2001. "Liquidity Risk and Expected Stock Returns," NBER Working Papers 8462, National Bureau of Economic Research, Inc.
- Acharya, Viral V & Gromb, Denis & Yorulmazer, Tanju, 2008.
"Imperfect Competition in the Inter-Bank Market for Liquidity as a Rationale for Central Banking,"
CEPR Discussion Papers
6984, C.E.P.R. Discussion Papers.
- Viral V. Acharya & Denis Gromb & Tanju Yorulmazer, 2012. "Imperfect Competition in the Interbank Market for Liquidity as a Rationale for Central Banking," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(2), pages 184-217, April.
- Mark J. Flannery, 1996.
"Financial crises, payment system problems, and discount window lending,"
Board of Governors of the Federal Reserve System (U.S.), pages 804-831.
- Flannery, Mark J, 1996. "Financial Crises, Payment System Problems, and Discount Window Lending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 804-24, November.
- Rochet, Jean-Charles & Vives, Xavier, 2002.
"Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?,"
CEPR Discussion Papers
3233, C.E.P.R. Discussion Papers.
- Jean-Charles Rochet & Xavier Vives, 2004. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1116-1147, December.
- Jean-Charles Rochet & Xavier Vives, 2002. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," FMG Discussion Papers dp408, Financial Markets Group.
- Rochet, Jean-Charles & Vives, Xavier, 2004. "Coordination Failures and the Lender of Last Resort : Was Bagehot Right After All?," IDEI Working Papers 294, Institut d'Économie Industrielle (IDEI), Toulouse.
- Rochet, Jean-Charles & Vives, Xavier, 2002. "Coordination failures and the lender of last resort : was Bagehot right after all?," HWWA Discussion Papers 184, Hamburg Institute of International Economics (HWWA).
- Jean-Charles Rochet & Xavier Vives, 2002. "Coordination failures and the lender of last resort: was Bagehot right after all?," LSE Research Online Documents on Economics 24928, London School of Economics and Political Science, LSE Library.
- Lawrence M. Ausubel, 2004. "An Efficient Ascending-Bid Auction for Multiple Objects," American Economic Review, American Economic Association, vol. 94(5), pages 1452-1475, December.
- Kjell G. Nyborg, 2004.
"Multiple Unit Auctions and Short Squeezes,"
Review of Financial Studies,
Society for Financial Studies, vol. 17(2), pages 545-580.
- Franklin Allen & Douglas Gale, 2003.
"Financial Intermediaries and Markets,"
Center for Financial Institutions Working Papers
00-44, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Sujit Kapadia & Matthias Drehmann & John Elliott & Gabriel Sterne, 2012.
"Liquidity Risk, Cash Flow Constraints, and Systemic Feedbacks,"
in: Quantifying Systemic Risk, pages 29-61
National Bureau of Economic Research, Inc.
- Kapadia, Sujit & Drehmann, Mathias & Elliott, John & Sterne, Gabriel, 2012. "Liquidity risk, cash-flow constraints and systemic feedbacks," Bank of England working papers 456, Bank of England.
- Philip Strahan, 2008. "Liquidity Production in 21st Century Banking," NBER Working Papers 13798, National Bureau of Economic Research, Inc.
- Jacob Gyntelberg & Philip Wooldridge, 2008. "Interbank rate fixings during the recent turmoil," BIS Quarterly Review, Bank for International Settlements, March.
- Tarun Chordia & Asani Sarkar & Avanidhar Subrahmanyam, 2003. "An empirical analysis of stock and bond market liquidity," Staff Reports 164, Federal Reserve Bank of New York.
- Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
- Jaffee, Dwight & Stiglitz, Joseph, 1990. "Credit rationing," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 16, pages 837-888 Elsevier.
- Erland Nier & Celine Gondat-Larralde, 2004. "The Microeconomics Of Retail Banking - An Empirical Analysis Of The UK Market For Personal Current Accounts," Royal Economic Society Annual Conference 2004 110, Royal Economic Society.
- François-Louis Michaud & Christian Upper, 2008. "What drives interbank rates? Evidence from the Libor panel," BIS Quarterly Review, Bank for International Settlements, March.
- Mathias Drehmann, 2007. "Discussion of 'Banks, Markets and Liquidity'," RBA Annual Conference Volume, in: Christopher Kent & Jeremy Lawson (ed.), The Structure and Resilience of the Financial System Reserve Bank of Australia.
- Pennacchi, George, 2006. "Deposit insurance, bank regulation, and financial system risks," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 1-30, January.
When requesting a correction, please mention this item's handle: RePEc:bis:biswps:316. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Beslmeisl)
If references are entirely missing, you can add them using this form.