The Shadow Cost of Repos and Bank Liability Structure

Nataliya Klimenko and Santiago Moreno-Bromberg
Additional contact information
Nataliya Klimenko: University of Zurich
Santiago Moreno-Bromberg: University of Zurich

No 15-04, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Making use of a structural model that allows for optimal liquidity management, we study the role that repos play in a bank’s financing structure. In our model the bank’s assets consist of illiquid loans and liquid reserves and are financed by a combination of repos, long–term debt, deposits and equity. Repos are a cheap source of funding, but they are subject to an exogenous rollover risk. We show that their use adds to the cost of long–term debt financing, which limits the bank’s appetite for unstable repo funding. This effect is, however, weakened under poor returns on assets, abundant deposit funding and the depositor preference rule. We also analyze the impact of a liquidity coverage ratio, payout restrictions and a leverage ratio on the bank’s financing choices and show that all these tools are able to curb the bank’s reliance on repos.

Keywords: Bank financing structure; repos; liquid reserves; rollover risk; regulation (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 G35 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2015-01, Revised 2015-05
New Economics Papers: this item is included in nep-ban
References: Add references at CitEc
Citations:

Downloads: (external link)
http://ssrn.com/abstract=2559780 (application/pdf)

Related works:
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:chf:rpseri:rp1504

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().