Funding liquidity risk and banks’ risk-taking behavior: the role of the COVID-19 crisis and bank size

What is it about?

When liquidity is high (hold high cash, for example), banks tend to be careless (for example lending to many corporations, including bad ones). This behavior potentially increases bank risk, thus increasing bank instability or bank crisis. In COVID-19 period, this behavior tends to increase. Small banks to exhibit higher behavior. Regulators should monitor banks all times, including in the situation when the risk seems low (abundant liquidity), the crisis, and especially for small banks.

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