THE RELATIONSHIP BETWEEN LIQUIDITY RISK AND PROBABILITY OF DEFAULT: EVIDENCE FROM THE EURO AREA

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Abstract

The main objective of this study is to analyze the type of relationship that exists between liquidity risk - measured with the liquidity coverage ratio and the net stable funding ratio - and the probability of default. The sample is composed of 575 listed and non-listed Eurozone banks and the methodology applied in the analysis is OLS regression based on panel data. The results show a relationship only between the liquidity coverage ratio and credit rating, while there is no relationship between the longterm liquidity measure and probability of default. In relation to the crisis, the results highlight divergent bank liquidity management only in the short time horizon.

Keywords: Probability of Default, Liquidity Risk, Rating

How to cite this paper: Cucinelli, D. (2013). The relationship between liquidity risk and probability of default: Evidence from the Euro area. Risk Governance and Control: Financial Markets & Institutions, 3(1), 42-50. https://doi.org/10.22495/rgcv3i1art5