Market discipline and liquidity risk: Evidence from the interbank funds market

Arbeitspapier

This paper identifies bank-specific-characteristics and market conditions that contribute to determine prices and demand for liquidity in the interbank market as wells as banks' access to this market. Results indicate that riskier banks pay higher prices and borrow less liquidity, concurrent with the existence of market discipline. More capitalized and liquid banks tend to pay less for their funds and to have greater access to the interbank market. We find that banks pay higher prices and hoard liquidity when liquidity positions across them are more imbalanced and during a monetary policy tightening. Besides, small banks are found to suffer more as their credit risk and liquidity risk increase. We show that lending relationships benefit banks in hedging liquidity risk. We also document that central bank liquidity increments are associated with a downward pressure on interbank funds' prices and augmented market activity. Overall, our results have implications for financial stability and for the transmission of the monetary policy as well.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Graduate Institute of International and Development Studies Working Paper ; No. HEIDWP14-2016

Classification and Topics

• Classification: Wirtschaft ; Interest Rates: Determination, Term Structure, and Effects ; Central Banks and Their Policies ; Transactional Relationships; Contracts and Reputation; Networks ; Asset Pricing; Trading Volume; Bond Interest Rates ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages
• Subject: interbank markets ; market discipline ; liquidity risk ; risk taking ; monetary policy ; financial stability

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Sarmiento, Miguel
• Event: Veröffentlichung
• (who): Graduate Institute of International and Development Studies
• (where): Geneva
• (when): 2016

Further information

• Handle: http://hdl.handle.net/10419/156130
• Last update: 10.03.2025, 11:42 AM CET