The consequences of liquidity imbalance: When net lenders leave interbank markets

The level as well as fluency of capital supply on the interbank market is crucial for banking sector liquidity. However, the dominance of individual players on this market leads to liquidity imbalance and, thus, might increase the risk for other banks. We test how different bank exposures in interba...

Full description

Saved in:
Bibliographic Details
Published in:Journal of financial stability 2018-06, Vol.36, p.82-97
Main Authors: Hryckiewicz, Aneta, Kozlowski, Lukasz
Format: Article
Language:English
Subjects:
Bank exits
Foreign banks
Interbank market
Liquidity imbalance
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:The level as well as fluency of capital supply on the interbank market is crucial for banking sector liquidity. However, the dominance of individual players on this market leads to liquidity imbalance and, thus, might increase the risk for other banks. We test how different bank exposures in interbank market translates into other bank liquidity risk and credit supply. To this end, we use 207 bank exits from interbank markets between 1997 and 2013 in 52 emerging and developed countries. We find that the withdrawal of a bank with high net exposure on interbank market leads to a statistically significant drop in the liquidity position of the remaining banks. The effect is also economically significant. Finally, we find that a liquidity imbalance adversely affects the bank credit supply. Our findings suggest that the consequences are more severe for banks heavily relying on the local interbank market, for emerging countries and surprisingly in pre-crisis periods.
ISSN:1572-3089
1878-0962
DOI:10.1016/j.jfs.2018.02.002