Liquidity Risk and Funding Cost
Journal
Review of Finance
ISSN
1572-3097
ISSN-Digital
1573-692X
Type
journal article
Date Issued
2022-03-25
Author(s)
Abstract
We propose and test a new channel that links funding liquidity risk and interest rates in short-term funding markets. Unlike existing theories that focus on premiums demanded by lenders, the funding liquidity risk channel postulates that borrowers exposed to liquidity shocks are willing to pay a markup for immediate funding. We test and quantify the channel using unique trade-by-trade data and uncover systematic differences across individual banks' funding cost driven by idiosyncratic liquidity risk. These differences are persistent over a decade, suggesting that the funding liquidity risk channel is relevant in general and not only arises during crisis times.
Language
English
Keywords
Funding liquidity
short-term interest rates
risk premiums
funding cost
interbank market
HSG Classification
contribution to scientific community
HSG Profile Area
SOF - System-wide Risk in the Financial System
Refereed
Yes
Volume
27
Number
2
Subject(s)
Eprints ID
266146