The Liquidity Dynamics of Bank Defaults

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....

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Bibliographic Details
Published in:European financial management : the journal of the European Financial Management Association 2014-03, Vol.20 (2), p.291-320
Main Authors: Morkoetter, Stefan, Schaller, Matthias, Westerfeld, Simone
Format: Article
Language:English
Subjects:
Assets
bank default
Bank failures
Bank liquidity
Banking system
Capital structure
Europe
income structure
Investors
Liquid assets
Liquidity
Money market
Studies
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Summary: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.
ISSN:1354-7798
1468-036X
DOI:10.1111/j.1468-036X.2011.00637.x