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Funding Liquidity Risk: Definition And Measurement

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Executive Summary

Funding liquidity risk has played a key role in all historical banking crises. Nevertheless, a measure based on publicly available data remains so far elusive. The authors address this gap by showing that aggressive bidding at central bank auctions reveals funding liquidity risk. They can extract an insurance premium from banks' bids which the authors propose as measure of funding liquidity risk. Using a unique data set consisting of all bids in the main refinancing operation auctions conducted at the ECB between June 2005 and October 2008 they find that funding liquidity risk is typically stable and low, with occasional spikes, especially around key events during the recent crisis.

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