We provide a theoretical decomposition of bank credit risk into insolvency risk and illiquidity risk, defining illiquidity risk to be the counterfactual probability of failure due to a run when the bank would have survived in the absence of a run. We show that illiquidity risk is (i) decreasing in the “liquidity ratio”—the ratio of realizable cash on the balance sheet to short-term liabilities; (ii) decreasing in the excess return of debt; and (iii) increasing in the solvency uncertainty—a measure of the variance of the asset portfolio.
|Original language||English (US)|
|Number of pages||14|
|Journal||International Economic Review|
|State||Published - Nov 1 2016|
All Science Journal Classification (ASJC) codes
- Economics and Econometrics