Liquidity Coinsurance and Bank Capital

Lóránth, Gyöngyi, Fabio Castiglionesi () and Fabio Feriozzi
Authors registered in the RePEc Author Service: Loriana Pelizzon ()

No 9162, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Banks can deal with their liquidity risk by holding liquid assets (self-insurance), by participating in the interbank market (coinsurance), or by using flexible financing instruments, such as bank capital (risk-sharing). We study how the access to an interbank market affects banks' incentive to hold capital. A general insight is that from a risk-sharing perspective it is optimal to postpone payouts to capital investors when a bank is hit by a liquidity shock that it cannot coinsure on the interbank market. This mechanism produces a negative relationship between interbank activity and bank capital. We provide empirical support for this prediction in a large sample of U.S. commercial banks, as well as in a sample of European and Japanese commercial banks.

Keywords: Liquidity coinsurance.; Bank capital; Interbank markets (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
Date: 2012-10
New Economics Papers: this item is included in nep-ban, nep-cba, nep-ias and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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