This paper develops a quantitative model of bank failures to examine how funding frictions shape balance-sheet pressures and the timing of default. Banks in the model face limited commitment, capital regulation, and costly access to illiquid liabilities. By issuing both deposits and time deposits, they manage short-run liquidity needs but increase their future repayment obligations and exposure to default. Default arises endogenously when equity falls below regulatory thresholds. The model shows that liability composition is a central determinant of banks’ resilience: long-term funding mitigates rollover risk and supports smoother cash flows in normal times, but heightens vulnerability once profitability and asset quality deteriorate. This dual role of time deposits generates the gradual rise in leverage, tightening margins, and accelerating credit losses that precede failure. The analysis demonstrates that funding structure is a key driver of bank stability and of the dynamics that push distressed institutions toward default.

This paper analyzes how heterogeneity in banks’ funding structures shapes the transmission of monetary policy. Banks finance themselves with liabilities that differ in maturity, and I document empirically that banks with longer-maturity liabilities are less responsive to monetary policy shocks. To interpret this finding, I develop a heterogeneous- bank macroeconomic model with endogenous default and funding choices. In the model, maturity choice arises from banks’ limited ability to raise new debt, due either to limited commitment or regulatory constraints. Long-term liabilities help constrained banks avoid liquidity shortfalls but entail higher funding costs. Using this framework, I quantify the aggregate implications of monetary policy and show that its effects depend critically on the distribution of banks’ funding maturities.

We investigate how exposure to the global financial cycle influences credit cycles and sovereign default risk in emerging markets. We document that emerging markets with financial sectors more reliant on foreign funding exhibit greater sensitivity to the Global Financial Cycle, proxied by the U.S. stock market volatility index (VIX). During periods of heightened global risk premium, these economies experience reduced lending and rising CDS spreads for their governments. Our model connects these phenomena, emphasizing the macro-financial linkages between global capital flows and domestic credit dynamics in emerging economies.