Noncore Bank Liabilities and Financial Vulnerability

Authors

  • JOON-HO HAHM,

  • HYUN SONG SHIN,

  • KWANHO SHIN


  • Paper presented at the Federal Reserve Board and JMCB conference on “Regulation of Systemic Risk,” Washington, DC, September 15–16, 2011. We are grateful to Stijn Claessens for his comments as discussant, and to Ken West and other participants at the conference for their feedback. The authors thank Yongwhan Jung and Ilsoo Hahn for their excellent research assistance. Kwanho Shin acknowledges support from a Korea University grant.

Abstract

A lending boom is reflected in the composition of bank liabilities when traditional retail deposits (core liabilities) cannot keep pace with asset growth and banks turn to other funding sources (noncore liabilities) to finance their lending. We formulate a model of credit supply as the flip side of a credit risk model where a large stock of noncore liabilities serves as an indicator of the erosion of risk premiums and hence of vulnerability to a crisis. We find supporting empirical evidence in a panel probit study of emerging and developing economies.

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