Funding Liquidity Risk: Definition and Measurement
By Mathias Drehmann, Kleopatra Nikolaou. Social Science Research Network, 2013
405 citations recorded by the source corpus.
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.
Subfields: Accounting, Finance
View Paper: https://www.semanticscholar.org/paper/1025d5cd5cb4024428fc326a650914c261dd2955
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Citations in the corpus
- Limits to arbitrage during the crisis: funding liquidity constraints and covered interest parity (2011, neutral): “Some of these are Cecchetti and Disyatat (2009), Drehmann and Nikolaou (2009) and Sarkar (2009).”
- Funding liquidity and bank risk taking (2017, background): “Drehmann and Nikolaou (2013) define funding liquidity risk as the banks’ failure to 1 We are grateful to Viral Acharya for pointing this out. http://dx.doi.org/10.1016/j.jbankfin.2016.09.005 0378-4266/© 2016 Elsevier B.V.”