The Liquidity Dynamics of Bank Defaults

30 Pages Posted: 15 Mar 2014

See all articles by Stefan Morkoetter

Stefan Morkoetter

University of St. Gallen - School of Finance

Matthias Schaller

Risk Solution Network AG

Simone Westerfeld

University of St. Gallen (HSG), School of Finance

Date Written: March 2014

Abstract

We compare liquidity patterns of 10,979 failed and non‐failed US banks from 2001 to mid‐2010 and detect diverging capital structures: failing banks distinctively change their liquidity position about three to five years prior to default by increasing liquid assets and decreasing liquid liabilities. The build‐up of liquid assets is primarily driven by short term loans, whereas long term loan positions are significantly reduced. By abandoning (positive) term transformation throughout the intermediate period prior to a default, failing banks drift away from the traditional banking business model. We show that this liquidity shift is induced by window dressing activities towards bondholders and money market investors as well as a bad client base.

Keywords: liquidity, bank default, capital structure, income structure

Suggested Citation

Morkoetter, Stefan and Schaller, Matthias and Westerfeld, Simone, The Liquidity Dynamics of Bank Defaults (March 2014). European Financial Management, Vol. 20, Issue 2, pp. 291-320, 2014. Available at SSRN: https://ssrn.com/abstract=2409358 or http://dx.doi.org/10.1111/j.1468-036X.2011.00637.x

Stefan Morkoetter (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Matthias Schaller

Risk Solution Network AG ( email )

Albisriederstrasse 80a
Zurich, Zurich 8003
Switzerland

Simone Westerfeld

University of St. Gallen (HSG), School of Finance ( email )

Dufourstrasse
St. Gallen, 9000
Switzerland

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