Bechtel, AlexanderAlexanderBechtelRanaldo, AngeloAngeloRanaldoWrampelmeyer, JanJanWrampelmeyer2023-04-132023-04-132019-05-14https://www.alexandria.unisg.ch/handle/20.500.14171/98647We 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.enFunding liquidity riskshort-term interest ratesrisk premiumsfunding costsinterbank marketworking paper