Bank Reliance on Short-Term Funds a Harbinger of Crisis
ByBanks that depend heavily on short-term sources of cash to fund longer-term operations and investments open themselves up to the risk of runs, and potentially a full-blown crisis, according to research from the Federal Reserve Bank of Dallas that identifies such “liquidity mismatches” as an early sign of impending trouble.
“Liquidity mismatch helps predict bank failure and distress one or two years ahead,” write Dallas Fed staffers J.B. Cooke, Christoffer Koch and Anthony Murphy in the regional bank’s May Economic Letter.
“Liquidity mismatch rose significantly before the financial crisis, especially at large banks,” the authors write. “The rise in mismatch contributed to the rise in bank failures and cases of distress.”…
Bank Reliance on Short-Term Funds a Harbinger of Crisis
