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Liquidity Mismatch, Bank Borrowing Decision and Distress: Empirical Evidence from Italian Credit Co-Operative Banks

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Abstract

Since the 2007–2008 financial crisis liquidity risk has become one of the top priorities for regulators and new liquidity requirements have been introduced. Despite the importance of liquidity risk and the progress in addressing it there is no consensus about how to measure it and how to do so in a such a way as to provide information about (endogenous) systemic liquidity risk. This work aims to implement the “Liquidity Mismatch Index” proposed by Brunnermeier et al. (2011) to measure the mismatch between market liquidity of assets and the funding liabilities, using a sample of Italian co-operative banks. It investigates the main determinants of this mismatch, how it correlates with other bank characteristics and whether it provides useful information about borrowing decisions and distress of banks.

Keywords

  • European Central Bank
  • Liquidity Risk
  • Market Liquidity
  • Liquidity Premia
  • Illiquid Asset

These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Notes

  1. 1.

    Moreover there is also an open debate about differentiating (liquidity) prudential regulation and supervision based on the varying nature of the risks posed by different groups of banks and there are still important differences in the ways the quantitative liquidity requirements have been transposed into national regulations and legislation. For instance, in the USA, LCR regulation has been adapted according to bank size and the community and smaller banks have been excluded from the scope of its application; in the EU, however, a ‘one-size-fits-all’ approach has been adopted. This difference in approach appears counter-intuitive and should stimulate further research on the appropriate measure of liquidity risk in order to better identify which banks carry the most liquidity risk and, consequently, to design the optimal regulation in this field. See Pezzotta 2013; Tarullo 2014, 2015.

  2. 2.

    See also Goodhart and Perotti (2015).

  3. 3.

    Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms.

  4. 4.

    Currently, Austrian and German co-operative banks have already established an IPS.

  5. 5.

    On the interaction between bank capital and bank’s liquidity position see Farag, Harland and Nixon (2013).

  6. 6.

    See ESRB (2014) with regard to potential instruments and indicators to address, monitor and assess systemic liquidity risk.

  7. 7.

    ECB (2011). Scalia et al. (2013) estimated that the ECB’s 3-year LTROs have raised the available stable funding (numerator of the NSFR) by €429 billion as of June 2012 for the sample banks with a shortfall.

  8. 8.

    On the effect of liquidity regulation on bank balance sheets see Banerjee and Mio (2014).

  9. 9.

    At the end of June 2015 the FITD had managed eleven interventions since its establishment in 1987. The total amount of these interventions equalled €1.5 billion (about 0.3 % of total covered deposits at year-end 2014); only two cases involved depositor payouts of very limited amounts. The FGDCC has managed 71 interventions since its establishment in 1997. The total amount of these interventions equalled €200 million (about 0.28 % of total covered deposits at year-end 2013); only one case involved a depositor payout (See De Polis 2015).

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Vento, G., Pezzotta, A., Di Colli, S. (2016). Liquidity Mismatch, Bank Borrowing Decision and Distress: Empirical Evidence from Italian Credit Co-Operative Banks. In: Carbó Valverde, S., Cuadros Solas, P., Rodríguez Fernández, F. (eds) Liquidity Risk, Efficiency and New Bank Business Models . Palgrave Macmillan Studies in Banking and Financial Institutions. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-30819-7_10

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