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The Liquidity Dynamics of Bank Defaults
Author(s) -
Morkoetter Stefan,
Schaller Matthias,
Westerfeld Simone
Publication year - 2014
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/j.1468-036x.2011.00637.x
Subject(s) - market liquidity , default , monetary economics , loan , business , financial system , position (finance) , liquidity risk , term (time) , economics , finance , physics , quantum mechanics
We compare liquidity patterns of 10,979 failed and non‐failed US banks from 2001 to mid‐2010 and detect diverging capital structures: failing banks distinctively change their liquidity position about three to five years prior to default by increasing liquid assets and decreasing liquid liabilities. The build‐up of liquid assets is primarily driven by short term loans, whereas long term loan positions are significantly reduced. By abandoning (positive) term transformation throughout the intermediate period prior to a default, failing banks drift away from the traditional banking business model. We show that this liquidity shift is induced by window dressing activities towards bondholders and money market investors as well as a bad client base.