Funding liquidity risk: definition and measurement

Mathias Drehmann and Kleopatra Nikolaou

No 316, BIS Working Papers from Bank for International Settlements

Abstract: Funding liquidity risk has played a key role in all historical banking crises. Nevertheless, a measure based on publicly available data remains so far elusive. We address this gap by showing that aggressive bidding at central bank auctions reveals funding liquidity risk. We can extract an insurance premium from banks' bids which we propose as measure of funding liquidity risk. Using a unique data set consisting of all bids in the main refinancing operation auctions conducted at the ECB between June 2005 and October 2008 we find that funding liquidity risk is typically stable and low, with occasional spikes, especially around key events during the recent crisis. We also document downward spirals between funding liquidity risk and market liquidity. As measurement without clear definitions is impossible, we initially provide definitions of funding liquidity and funding liquidity risk.

Keywords: funding liquidity; liquidity risk; bidding behavior; central bank auctions; interbank markets (search for similar items in EconPapers)
Pages: 35 pages
Date: 2010-07
New Economics Papers: this item is included in nep-ban
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

Downloads: (external link)
http://www.bis.org/publ/work316.pdf Full PDF document (application/pdf)
http://www.bis.org/publ/work316.htm (text/html)

Related works:
Working Paper: Funding liquidity risk: definition and measurement (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:316

Access Statistics for this paper

More papers in BIS Working Papers from Bank for International Settlements Contact information at EDIRC.
Bibliographic data for series maintained by Martin Fessler (webmaster@bis.org).