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The shadow cost of repos and bank liability structure


Moreno, Santiago; Klimenko, Nataliya (2015). The shadow cost of repos and bank liability structure. Swiss Finance Institute Research Paper 15-04, University of Zurich.

Abstract

Making use of a structural model that allows for optimal liquidity management, we study the role that repos play in a bank's financing structure. In our model the bank's assets consist of illiquid loans and liquid reserves and are financed by a combination of repos, long--term debt, deposits and equity. Repos are a cheap source of funding, but they are subject to an exogenous rollover risk. We show that their use adds to the cost of long--term debt financing, which limits the bank's appetite for unstable repo funding. This effect is, however, weakened under poor returns on assets, abundant deposit funding and the depositor preference rule. We also analyze the impact of a liquidity coverage ratio, payout restrictions and a leverage ratio on the bank's financing choices and show that all these tools are able to curb the bank's reliance on repos.

Abstract

Making use of a structural model that allows for optimal liquidity management, we study the role that repos play in a bank's financing structure. In our model the bank's assets consist of illiquid loans and liquid reserves and are financed by a combination of repos, long--term debt, deposits and equity. Repos are a cheap source of funding, but they are subject to an exogenous rollover risk. We show that their use adds to the cost of long--term debt financing, which limits the bank's appetite for unstable repo funding. This effect is, however, weakened under poor returns on assets, abundant deposit funding and the depositor preference rule. We also analyze the impact of a liquidity coverage ratio, payout restrictions and a leverage ratio on the bank's financing choices and show that all these tools are able to curb the bank's reliance on repos.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:27 January 2015
Deposited On:26 Nov 2015 11:08
Last Modified:08 Dec 2017 15:05
Series Name:Swiss Finance Institute Research Paper
Number of Pages:50
Related URLs:http://ssrn.com/abstract=2559780
Other Identification Number:merlin-id:12027

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