The price of liquidity: the effects of market conditions and bank characteristics

Kjell Nyborg, Falko Fecht and Jörg Rocholl

No 1376, Working Paper Series from European Central Bank

Abstract: We study the prices that individual banks pay for liquidity (captured by borrowing rates in repos with the central bank and benchmarked by the overnight index swap) as a function of market conditions and bank characteristics. These prices depend in particular on the distribution of liquidity across banks, which is calculated over time using individual bank-level data on reserve requirements and actual holdings. Banks pay more for liquidity when positions are more imbalanced across banks, consistent with the existence of short squeezing. We also show that small banks pay more for liquidity and are more vulnerable to squeezes. Healthier banks pay less but, contrary to what one might expect, banks in formal liquidity networks do not. State guarantees reduce the price of liquidity but do not protect against squeezes. JEL Classification: G12, G21, E43, E58, D44

Keywords: banks; imbalance; liquidity; money markets; repos (search for similar items in EconPapers)
Date: 2011-09
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mon
Note: 77663
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (65)

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Journal Article: The price of liquidity: The effects of market conditions and bank characteristics (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20111376

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