Bank Rollover Risk and Liquidity Supply Regimes
40 Pages Posted: 15 Apr 2020 Last revised: 13 Jan 2023
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Bank Rollover Risk and Liquidity Supply Regimes
A New Indicator of Bank Funding Cost
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: Suggested Citation