Funding liquidity and bank risk taking |
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| Institution: | 1. UTS Business School, University of Technology Sydney, Australia\n;2. University of Sydney Business School, University of Sydney, Australia;1. Swiss National Bank, University of Zürich, Switzerland;2. Swiss National Bank, University of Basel, Switzerland;3. Swiss National Bank, Switzerland;1. Bank of Canada, Canada;2. Federal Reserve Bank of New York, United States;3. Nova School of Business and Economics, Portugal;1. The Bank of Korea, 39 Namdaemun-Ro, Seoul, Republic of Korea;2. KDI School of Public Policy and Management and the Bank of Korea Economic Research Institute, 263 Namsejong-Ro, Sejong, 339-007, Republic of Korea |
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| Abstract: | This study examines the relationship between funding liquidity and bank risk taking. Using quarterly data for U.S. bank holding companies from 1986 to 2014, we find evidence that banks having lower funding liquidity risk as proxied by higher deposit ratios, take more risk. A reduction in banks’ funding liquidity risk increases bank risk as evidenced by higher risk-weighted assets, greater liquidity creation and lower Z-scores. However, our results show that bank size and capital buffers usually limit banks from taking more risk when they have lower funding liquidity risk. Moreover, during the Global Financial Crisis banks with lower funding liquidity risk took less risk. The findings of this study have implications for bank regulators advocating greater liquidity and capital requirements for banks under Basel III. |
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