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Discussion of “Systemic Risk and the Solvency-Liquidity Nexus of Banks”

Author

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  • Tobias Adrian

Abstract

Pierret (2015) presents empirical analysis of the solvency-liquidity nexus for the banking system, documenting that a shock to the level of banks? solvency risk is followed by lower short-term debt. Conversely, higher short-term debt Granger-causes higher solvency risk. These results point toward a tight interaction between solvency and liquidity risk over time. My comments are threefold. First, I suggest improving the identification of shocks in Pierret?s vector autoregressive setup. Second, I caution against using the quantitative results as the basis for setting policy. Third, I recommend using theoretical restrictions from macro-finance theories to improve identification and interpretation.

Suggested Citation

  • Tobias Adrian, 2015. "Discussion of “Systemic Risk and the Solvency-Liquidity Nexus of Banks”," Staff Reports 722, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:722
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    References listed on IDEAS

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    1. Tobias Adrian & Nina Boyarchenko, 2012. "Intermediary leverage cycles and financial stability," Staff Reports 567, Federal Reserve Bank of New York, revised 01 Feb 2015.
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    2. Ellis, Scott & Sharma, Satish & Brzeszczyński, Janusz, 2022. "Systemic risk measures and regulatory challenges," Journal of Financial Stability, Elsevier, vol. 61(C).

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    Keywords

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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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