Liquidity Risk and Funding Cost

70 Pages Posted: 20 May 2019 Last revised: 31 Aug 2020

See all articles by Alexander Bechtel

Alexander Bechtel

University of St. Gallen - School of Finance

Angelo Ranaldo

University of St. Gallen; Swiss Finance Institute

Jan Wrampelmeyer

Vrije Universiteit Amsterdam, School of Business and Economics

Date Written: May 14, 2019

Abstract

We propose and test a new channel that links funding liquidity risk and interest rates in short-term funding markets. Borrowers with high liquidity risk are willing to pay a markup to lock in their funding, independent of risk premiums demanded by lenders. We test the channel using unique trade-by-trade data and reveal systematic and persistent differences in borrowers' funding liquidity risk that lead to systematic and persistent heterogeneity in funding costs. Our results have important implications for financial stability, the transmission of monetary policy, and banks' asset and liability management.

Keywords: funding liquidity risk, short-term interest rates, risk premiums, funding costs, interbank market

JEL Classification: G12, G18, G21, E43, E52, D40

Suggested Citation

Bechtel, Alexander and Ranaldo, Angelo and Wrampelmeyer, Jan, Liquidity Risk and Funding Cost (May 14, 2019). University of St.Gallen, School of Finance Research Paper No. 2019/03 , Proceedings of Paris December 2019 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: https://ssrn.com/abstract=3391129 or http://dx.doi.org/10.2139/ssrn.3391129

Alexander Bechtel (Contact Author)

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

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Angelo Ranaldo

University of St. Gallen ( email )

School of Finance
Unterer Graben 21
St. Gallen, 9000
Switzerland
+41712247010 (Phone)

HOME PAGE: http://fin-sr.unisg.ch

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland
+41796637711 (Phone)

HOME PAGE: http://www.sfi.ch/de/about-us/news/hsg-faculty-members

Jan Wrampelmeyer

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

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