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

32 Pages Posted: 3 Feb 2012 Last revised: 5 May 2012

Date Written: January 1, 2012

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

Vazquez, Francisco and Federico, Pablo Mariano, Bank Funding Structures and Risk: Evidence from the Global Financial Crisis (January 1, 2012). Available at SSRN: https://ssrn.com/abstract=1997439 or http://dx.doi.org/10.2139/ssrn.1997439

Francisco Vazquez (Contact Author)

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Pablo Mariano Federico

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

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