Liquidity Risk Drivers and Bank Business Models

This paper examines the bank liquidity risk while using a maturity mismatch indicator of loans and deposits (LTD<sub>m</sub>) during a specific period. Core banking activities that are based on the process of maturity transformation are the most exposed to liquidity risk. The financial c...

Full description

Bibliographic Details
Main Authors: Simona Galletta, Sebastiano Mazzù
Format: Article
Language:English
Published: MDPI AG 2019-08-01
Series:Risks
Subjects:
Online Access:https://www.mdpi.com/2227-9091/7/3/89
_version_ 1818191126557884416
author Simona Galletta
Sebastiano Mazzù
author_facet Simona Galletta
Sebastiano Mazzù
author_sort Simona Galletta
collection DOAJ
description This paper examines the bank liquidity risk while using a maturity mismatch indicator of loans and deposits (LTD<sub>m</sub>) during a specific period. Core banking activities that are based on the process of maturity transformation are the most exposed to liquidity risk. The financial crisis in 2007&#8722;2009 highlighted the importance of liquidity to the functioning of both the financial markets and the banking sector. We investigate how characteristics of a bank, such as size, capital, and business model, are related to liquidity risk, while using a sample of European banks in the period after the financial crisis, from 2011 to 2017. While employing a generalized method of moment two-step estimator, we find that the banking size increases the liquidity risk, whereas capital is not an effective deterrent. Moreover, our findings reveal that, for savings banks, income diversification raises the liquidity risk while investment banks reliant on non-deposit funding decrease the exposure to liquidity risk.
first_indexed 2024-12-12T00:09:39Z
format Article
id doaj.art-b66ed6ff5f2348f384659242d3d2dc03
institution Directory Open Access Journal
issn 2227-9091
language English
last_indexed 2024-12-12T00:09:39Z
publishDate 2019-08-01
publisher MDPI AG
record_format Article
series Risks
spelling doaj.art-b66ed6ff5f2348f384659242d3d2dc032022-12-22T00:45:00ZengMDPI AGRisks2227-90912019-08-01738910.3390/risks7030089risks7030089Liquidity Risk Drivers and Bank Business ModelsSimona Galletta0Sebastiano Mazzù1Department of Economics, University of Messina, Piazza Pugliatti, 1, 98122 Messina, ItalyDepartment of Economics and Business, University of Catania, Corso Italia 55, 95129 Catania, ItalyThis paper examines the bank liquidity risk while using a maturity mismatch indicator of loans and deposits (LTD<sub>m</sub>) during a specific period. Core banking activities that are based on the process of maturity transformation are the most exposed to liquidity risk. The financial crisis in 2007&#8722;2009 highlighted the importance of liquidity to the functioning of both the financial markets and the banking sector. We investigate how characteristics of a bank, such as size, capital, and business model, are related to liquidity risk, while using a sample of European banks in the period after the financial crisis, from 2011 to 2017. While employing a generalized method of moment two-step estimator, we find that the banking size increases the liquidity risk, whereas capital is not an effective deterrent. Moreover, our findings reveal that, for savings banks, income diversification raises the liquidity risk while investment banks reliant on non-deposit funding decrease the exposure to liquidity risk.https://www.mdpi.com/2227-9091/7/3/89bank riskbusiness modelsliquidity riskmaturity mismatch
spellingShingle Simona Galletta
Sebastiano Mazzù
Liquidity Risk Drivers and Bank Business Models
Risks
bank risk
business models
liquidity risk
maturity mismatch
title Liquidity Risk Drivers and Bank Business Models
title_full Liquidity Risk Drivers and Bank Business Models
title_fullStr Liquidity Risk Drivers and Bank Business Models
title_full_unstemmed Liquidity Risk Drivers and Bank Business Models
title_short Liquidity Risk Drivers and Bank Business Models
title_sort liquidity risk drivers and bank business models
topic bank risk
business models
liquidity risk
maturity mismatch
url https://www.mdpi.com/2227-9091/7/3/89
work_keys_str_mv AT simonagalletta liquidityriskdriversandbankbusinessmodels
AT sebastianomazzu liquidityriskdriversandbankbusinessmodels