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Bank Funding Structures and Risk; Evidence From the Global Financial Crisis

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  • Pablo Federico
  • Francisco F. Vazquez

Abstract

This paper analyzes the evolution of bank funding structures in the run up to the global financial crisis and studies the implications for financial stability, exploiting a bank-level dataset that covers about 11,000 banks in the U.S. and Europe during 2001?09. The results show that banks with weaker structural liquidity and higher leverage in the pre-crisis period were more likely to fail afterward. The likelihood of bank failure also increases with bank risk-taking. In the cross-section, the smaller domestically-oriented banks were relatively more vulnerable to liquidity risk, while the large cross-border banks were more susceptible to solvency risk due to excessive leverage. The results support the proposed Basel III regulations on structural liquidity and leverage, but suggest that emphasis should be placed on the latter, particularly for the systemically-important institutions. Macroeconomic and monetary conditions are also shown to be related with the likelihood of bank failure, providing a case for the introduction of a macro-prudential approach to banking regulation.

Suggested Citation

  • Pablo Federico & Francisco F. Vazquez, 2012. "Bank Funding Structures and Risk; Evidence From the Global Financial Crisis," IMF Working Papers 12/29, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:12/29
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial crisis; Bank capital; Bankruptcy; Banks; Global Financial Crisis 2008-2009; Monetary policy; Risk management; pre-crisis; bank failure; bank liquidity; global financial crisis; Financial Institutions and Services: Government Policy and Regulation; Bank Liquidity Creation; Basel Iii; Macro-prudential Regulations;

    JEL classification:

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

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