Funding Fragility And Commercial Bank Failures

Abstract

I examine the link between funding composition and the hundreds of failures of US commercial banks that followed the 2007-2008 funding phase of the Great Recession. I test whether these failures were induced by market-wide funding freezes that were unrelated to policy fundamentals, or by funding freezes that were idiosyncratic to failed banks but unrelated to bank fundamentals. The empirical evidence rejects both propositions. Funding structures remained relatively stable during the crisis. Intertemporal variation in aggregate funding costs can be explained by shifts in policy rates. Variation in the spread in funding costs between failed and nonfailed banks ,at the time that failure rates peaked, can be explained almost entirely by differences in solvency risk.