Liquidity Shocks in the Eurosystem Interbank Market

Abstract We develop a model where banks invest in reserves and loans, and trade loans on the interbank market to deal with liquidity shocks. Two types of equilibria emerge, depending on the degree of credit market competition and the level of aggregate liquidity risk. In one equilibrium, all banks keep enough reserves and remain solvent. In the other, some banks default with positive probability. The latter equilibrium exists when competition is weak and large liquidity shocks are unlikely. The model delivers several implications concerning the relationship between competition, aggregate credit, and welfare.

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Liquidity Shocks, Bank Runs and the Interbank Market

Economics of Banking ◽

10.1007/978-1-137-45305-1_14 ◽

2016 ◽

pp. 277-298

Author(s):

Hans Keiding

Keyword(s):

Bank Runs ◽

Interbank Market ◽

Liquidity Shocks

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Lender of Last Resort

The Oxford Handbook of Banking ◽

10.1093/oxfordhb/9780198824633.013.20 ◽

2019 ◽

pp. 601-629

Author(s):

Xavier Freixas ◽

Bruno M. Parigi

Keyword(s):

Sovereign Debt ◽

Global Financial Crisis ◽

Banking Industry ◽

Debt Crisis ◽

Theoretical Models ◽

Safety Net ◽

Interbank Market ◽

Lender Of Last Resort ◽

Liquidity Shocks ◽

The Global Financial Crisis

The global financial crisis and the sovereign debt crisis in Europe have redefined the functions of the lender of last resort (LOLR). First, they have placed the LOLR at the intersection of monetary policy, fiscal policy, supervision, and regulation of the banking industry. Second, they have given regulatory authorities the additional responsibility of monitoring the interbank market. Third, they have extended the LOLR role to cover the possible bailout of non-bank institutions, including sovereign countries. This chapter explores the link between the theoretical models of the banking industry and the unprecedented policies displayed in the aftermath of the crisis. We begin by examining the justification of LOLR in a simplified framework where only liquidity shocks arise, to move to a setting where liquidity shocks cannot be disentangled from solvency ones. We then study contagion in the interbank market and systemic risk, two pathologies due to the imperfections of the financial markets, and we discuss the issues raised by the implementation of the LOLR policy within the safety net.

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Liquidity Risk Sensitivity of Czech Commercial Banks

Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis ◽

10.11118/actaun201462020427 ◽

2014 ◽

Vol 62 (2) ◽

pp. 427-436

Author(s):

Pavla Vodová

Keyword(s):

Commercial Banks ◽

Banking Sector ◽

Balance Sheet ◽

Liquidity Risk ◽

Negative Influence ◽

Annual Reports ◽

Risk Sensitivity ◽

Interbank Market ◽

Liquidity Shocks ◽

The Impact

The recent financial crisis has shown that a liquidity risk plays an important role in the current developed financial system. One of the efficient tools of liquidity risk management is stress testing which can show banks their potential vulnerability to liquidity shocks. The aim of this paper is therefore to measure the liquidity risk sensitivity of Czech commercial banks and to find out the most severe scenario and the most vulnerable bank. Our sample included significant part of the Czech banking sector; we used unconsolidated balance sheet data over the period from 2000 to 2011 which were obtained from annual reports of Czech banks. We have evaluated liquidity risk of each bank in the sample via six different liquidity ratios. Then we stressed these baseline values in three stress scenarios: run on a bank (simulated by a 20% withdrawal of deposits), confidence crisis on the interbank market (simulated by a withdrawal of 20% of interbank deposits) and use of committed loans by counterparties (simulated by a 5% increase of loans provided to nonbank clients). We measured the impact of all scenarios by relative change of liquidity ratios. The impact of modelled liquidity shocks differs among scenarios. The most serious liquidity problems would be caused by the first scenario – run on a bank. The negative influence of third scenario (use of committed loans) is less severe. The confidence crisis on the interbank market would not affect bank liquidity at all. The results also show that the severity of the impact of all scenarios worsens in periods of financial distress. We have also found that large and medium sized banks are most vulnerable to liquidity shocks, mainly to massive deposit withdrawals.

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