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Unsecured and Secured Funding

Mario di Filippo (), Angelo Ranaldo () and Jan Wrampelmeyer ()
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Mario di Filippo: The World Bank
Jan Wrampelmeyer: Vrije Universiteit Amsterdam

No 18-038/IV, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We empirically investigate why wholesale funding is fragile by providing the first study of how individual banks borrow and lend in the euro unsecured and secured interbank market. Consistent with theories in which lenders enforce market discipline by monitoring counterparty credit risk and theories highlighting that secured loans are less informational sensitive, we find that banks with low credit worthiness replace unsecured borrowing with secured loans. Moreover, riskier lenders provide more secured loans to replace unsecured lending, which is not consistent with speculative or precautionary liquidity hoarding theories. Instead, lenders are precautionary in the sense that they prefer to lend against safe collateral.

Keywords: Liquidity hoarding; asymmetric information; counterparty credit risk; wholesale funding fragility; interbank market; liquidity (search for similar items in EconPapers)
JEL-codes: E42 E43 E58 G01 G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2018-04-14
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Working Paper: Unsecured and Secured Funding (2016) Downloads
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