Header

UZH-Logo

Maintenance Infos

The shadow costs of repos and bank liability structure


Klimenko, Nataliya; Moreno, Santiago (2016). The shadow costs of repos and bank liability structure. Journal of Economic Dynamics and Control, 65:1-29.

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 the use of repos inflicts two types of indirect (“shadow”) costs on the bank׳s shareholders: first, it induces the bank to maintain higher liquid reserves in order to alleviate the additional default risk; second, it adds to the cost of long-term debt financing. These shadow costs limit the bank׳s appetite for cheap but unstable repo funding. This effect is, however, weakened under poor returns on risky assets, access to 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 the use of repos inflicts two types of indirect (“shadow”) costs on the bank׳s shareholders: first, it induces the bank to maintain higher liquid reserves in order to alleviate the additional default risk; second, it adds to the cost of long-term debt financing. These shadow costs limit the bank׳s appetite for cheap but unstable repo funding. This effect is, however, weakened under poor returns on risky assets, access to 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.

Statistics

Altmetrics

Downloads

2 downloads since deposited on 06 Jan 2017
2 downloads since 12 months
Detailed statistics

Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:2016
Deposited On:06 Jan 2017 14:23
Last Modified:08 Dec 2017 21:52
Publisher:Elsevier
ISSN:0165-1889
Publisher DOI:https://doi.org/10.1016/j.jedc.2016.01.004
Related URLs:http://www.sciencedirect.com/science/article/pii/S0165188915300117 (Publisher)
Other Identification Number:merlin-id:13296

Download

Content: Accepted Version
Filetype: PDF - Registered users only until 2 February 2019
Size: 914kB
View at publisher
Embargo till: 2019-02-02