Systemic Funding Liquidity Risk and Bank Failures

Posted: 20 Sep 2013

See all articles by Han Hong

Han Hong

Stanford University

Deming Wu

Government of the United States of America - Office of the Comptroller of the Currency (OCC)

Date Written: September 19, 2013

Abstract

We examine the roles of idiosyncratic and systemic funding liquidity risks in bank failures. We estimate a discrete-time hazard model of bank failure using data of U.S. commercial banks between 1985 and 2004, and examine its out-of-sample forecasting performance between 2005 and 2011. The out-of-sample performance comparison shows this model outperforms typical bank failure prediction models. We find that systemic funding liquidity risk, as measured by the interbank interest rate spread, was a major predictor of bank failures in 2008 and 2009. This finding has important implications for the new international standards on liquidity risk management.

Keywords: Bank failure, Insolvency risk, Liquidity risk, Systemic funding liquidity risk, Texas ratio

JEL Classification: G21, G28, G01, G17, C53, C58

Suggested Citation

Hong, Han and Wu, Deming, Systemic Funding Liquidity Risk and Bank Failures (September 19, 2013). Available at SSRN: https://ssrn.com/abstract=2328421 or http://dx.doi.org/10.2139/ssrn.2328421

Han Hong

Stanford University ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States

Deming Wu (Contact Author)

Government of the United States of America - Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street SW
Washington, DC 20219
United States

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