Banks' Liquidity Management and Systemic Risk

Ettore Panetti and Luca Deidda

Working Paper CRENoS from Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia

Abstract: We study a novel mechanism to explain the interaction between banks' liquidity management and the emergence of systemic financial crises, in the form of self-fulfilling runs. To this end, we develop an environment where banks offer insurance to their depositors against both idiosyncratic and aggregate real shocks, by holding a portfolio of liquidity and illiquid productive assets. Moreover, banks' asset portfolios and the probability of a depositors' self-fulfilling run are jointly determined via a "global game". We characterize the sufficient conditions under which there exists a unique threshold recovery rate, associated with the early liquidation of the productive assets, below which the banks first employ liquidity and then liquidate, in order to finance depositors' early withdrawals. Ex ante, the banks hold more liquidity than in a full-information economy, where there are no self-fulfilling runs and risk is only due to idiosyncratic and aggregate real shocks.

Keywords: systemic risk; global games; excess liquidity; bank runs (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-ban and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://crenos.unica.it/crenos/node/7054
https://crenos.unica.it/crenos/sites/default/files/wp-17-05.pdf (application/pdf)

Related works:
Working Paper: Banks’ Liquidity Management and Systemic Risk (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cns:cnscwp:201705

Access Statistics for this paper

More papers in Working Paper CRENoS from Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia Contact information at EDIRC.
Bibliographic data for series maintained by CRENoS ().