The dependency of the banks’ assets and liabilities: Evidence from Germany

Two decades of developments in risk-transfer instruments may have fundamentally changed the extent to which banks practice on-balance sheet term and liquidity transformation. These changes should be deliberated in on-balance sheet asset-liability dependencies. By using correlation analyses, we investigate asset-liability dependency for all three sectors of German universal banks from 1994 to 2007 and find that it declined over our sample period. We also investigate whether asset-liability dependency varies systematically with a bank's affinity for using risk-transfer instruments, regulatory capital, and profitability and document several differences between the three sectors of German universal banks.