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

  • Pablo Federico
  • Francisco F. Vázquez

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.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/29.

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Length: 33
Date of creation: 01 Jan 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/29
Contact details of provider: Postal: International Monetary Fund, Washington, DC USA
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  1. Luc Laeven & Fabian Valencia, 2010. "Resolution of Banking Crises: The Good, the Bad, and the Ugly," IMF Working Papers 10/146, International Monetary Fund.
  2. Pierluigi Bologna, 2011. "Is there a role for funding in explaining recent US bank failures?," Questioni di Economia e Finanza (Occasional Papers) 103, Bank of Italy, Economic Research and International Relations Area.
  3. Rocco Huang & Lev Ratnovski, 2009. "The dark side of bank wholesale funding," Working Papers 09-3, Federal Reserve Bank of Philadelphia.
  4. Gomez-Gonzalez, Jose E. & Kiefer, Nicholas M., 2006. "Bank Failure: Evidence from the Colombia Financial Crisis," Working Papers 06-12, Cornell University, Center for Analytic Economics.
  5. Rocco Huang & Lev Ratnovski, 2009. "Why Are Canadian Banks More Resilient?," IMF Working Papers 09/152, International Monetary Fund.
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