Abstract
This timely paper examines a fundamental cause of the recent financial crisis motivated by a specific type of funding liquidity risk also known as rollover risk. I explore short-term leverage as a function of the level of maturity mismatch through analysis of a bank’s inability to refinance short-term debt and holdings of liquid assets. This study examines the firm-level effects of various measures of rollover risk on broad market measures of risk including total risk, idiosyncratic risk, and interest rate risk for bank holding companies. Results suggest that banks can achieve economically important reductions in risk through reductions in short-term debt in the forms of sale and repurchase agreements and brokered deposits. Counterintuitive to the notion that liquid assets provide a buffer against shocks, I also find that bank risk cannot be further reduced by holding additional cash and treasury bonds. Results have important managerial and regulatory implications for the assessment of risk exposures utilizing information that is readily available and discernable from banks’ balance sheets and income statements.
Published Version
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