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Liquidity Risk and Funding Cost

Alexander Bechtel (), Angelo Ranaldo () and Jan Wrampelmeyer ()

No 1903, Working Papers on Finance from University of St. Gallen, School of Finance

Abstract: We propose and test a new channel that links funding liquidity risk and interest rates in short-term funding markets. Borrowers with high liquidity risk are willing to pay a markup to lock in their funding, independent of risk premiums demanded by lenders. We test the channel using unique trade-by-trade data and reveal systematic an persistent differences in borrowers' funding liquidity risk that lead to systematic and persistent heterogeneity in funding costs. Our results have important implications for financial stability, the transmission of monetary policy, and banks' asset and liability management

Keywords: Funding liquidity risk; short-term interest rates; risk premiums; funding costs; interbank market (search for similar items in EconPapers)
JEL-codes: D40 E43 E52 G12 G18 G21 (search for similar items in EconPapers)
Pages: 66 pages
Date: 2019-05, Revised 2020-08
New Economics Papers: this item is included in nep-cfn, nep-mac and nep-mon
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Handle: RePEc:usg:sfwpfi:2019:03