Funding Risk, Liquidity Risk and the Solvency Ratio in a Liquidity Spiral Model

Daniel Osorio-Rodriguez ()

in Premio de Banca Central Rodrigo Gómez / Central Banking Award "Rodrigo Gómez" from Centro de Estudios Monetarios Latinoamericanos, CEMLA

Abstract: The works analyze the liquidity risk mechanic faced by banks when this merge as result of the exacerbation of funding risk. To that it use a wider version of the Model Estrada ans Osorio [2006]. The mechanis is as follows: Once that the the treasurers confront shortage of liquid resources, they liquid a proportion of their investent portafolio, facing a reduccion in their price wheter such liquidity is low. So this, a spiral of liquidity is generated if investments are valued in the sheet of balance at market prices. The model simulations explore the effect of credit demand, volatility of deposits, capital and minimum solvency ratio on the spiral of liquidity. The model explains the positive relationship between market size and price seen in episodes of liquidity spirals and would challenge both the existence of market impact (market impact) the relevance of the concept of too big to fail when the funding risk is idiosyncratic and not systemic.

Keywords: Banks; Treasurer; Liquidity risk; Systemic risk; Liquidity spiral; Mark-to-market (search for similar items in EconPapers)
JEL-codes: G10 G15 G18 G21 (search for similar items in EconPapers)
Date: 2008
ISBN: 978-607-7734-01-7
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