Systemic Funding Liquidity Risk and Bank Failures
Posted: 20 Sep 2013
Date Written: September 19, 2013
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
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