Bank Funding Structures and Risk: Evidence From the Global Financial Crisis

IMF Working Papers, January 1, 2012

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The paper analyzes the evolution of bank funding structures in the run up to the global financial crisis and studies the implications for financial stability using a bank-level dataset that covers about 11,000 banks in the U.S. and Europe during 2001?09.
Banks with weaker structural liquidity in the pre-crisis period were more likely to fail afterward.
Banks with higher leverage in the pre-crisis period were more likely to fail afterward.
The likelihood of bank failure increases with bank risk-taking.
In the cross-section:
- Smaller domestically-oriented banks were relatively more vulnerable to liquidity risk.
- Large cross-border banks were more susceptible to solvency risk due to excessive leverage.
Macroeconomic and monetary conditions are related with the likelihood of bank failure.

The results support the proposed Basel III regulations on structural liquidity and leverage.
The evidence suggests emphasis should be placed on leverage regulations, particularly for systemically-important institutions.
The link between macroeconomic and monetary conditions and bank failure likelihood provides a case for the introduction of a macro-prudential approach to banking regulation.

Dataset covers about 11,000 banks in the U.S. and Europe during 2001?09.
The study focuses on evolution of funding structures, structural liquidity, leverage, and bank risk-taking as predictors of failure.