Bank Rollover Risk and Liquidity Supply Regimes

40 Pages Posted: 15 Apr 2020 Last revised: 13 Jan 2023

See all articles by Eric Jondeau

Eric Jondeau

University of Lausanne - Faculty of Business and Economics (HEC Lausanne); Swiss Finance Institute; Swiss Finance Institute

Benoît Mojon

Bank for International Settlements (BIS)

Jean-Guillaume Sahuc

Banque de France; Université Paris Ouest - Nanterre, La Défense - EconomiX

Multiple version iconThere are 3 versions of this paper

Date Written: April 9, 2020

Abstract

The maturity mismatch between their short-term financing and long-term lending exposes banks to the risk of rolling over a maturing financial debt obligation. Such a rollover risk is sufficient on its own to cause a panic at the bank level and have a ripple effect on the banking system as a whole. We propose a new indicator that helps central banks monitor rollover risk and thus design liquidity support operations when needed. Building on forward rates, our indicator captures the way banks manage the impact of expected interest rate fluctuations on their financing structure. We show that it serves as a better signal of the change in the monetary policy stance and has a higher predictive power for economic growth and bank lending than usual bank credit spreads. In addition, our indicator helps to contrast three liquidity regimes (crisis, moderate, and abundant), which coincide with the levels of excess liquidity supplied by central banks.

Keywords: Bank rollover risk, bank credit spreads, liquidity supply regimes, multicurve environment, economic activity predictability.

JEL Classification: E44, E58, G1, G21

Suggested Citation

Jondeau, Eric and Mojon, Benoît and Sahuc, Jean-Guillaume, Bank Rollover Risk and Liquidity Supply Regimes (April 9, 2020). Swiss Finance Institute Research Paper No. 20-20, Available at SSRN: https://ssrn.com/abstract=3575715 or http://dx.doi.org/10.2139/ssrn.3575715

Eric Jondeau (Contact Author)

University of Lausanne - Faculty of Business and Economics (HEC Lausanne) ( email )

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Swiss Finance Institute ( email )

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Swiss Finance Institute

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Benoît Mojon

Bank for International Settlements (BIS) ( email )

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Switzerland

Jean-Guillaume Sahuc

Banque de France ( email )

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Université Paris Ouest - Nanterre, La Défense - EconomiX ( email )

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