The Impact of Exogenous Liquidity Shocks on Banks Funding Costs: Microevidence from the Unsecured Interbank Market

Miguel Sarmiento ()

No 01-2019, IHEID Working Papers from Economics Section, The Graduate Institute of International Studies

Abstract: This paper examines the impact of exogenous liquidity shocks in the unsecured interbank market. We evaluate the effects of idiosyncratic liquidity shocks—arising from deposits outflow at the bank level—and of the aggregate liquidity shock related to the U.S. tapering observed between May and September of 2013. We find that both liquidity shocks are associated with higher interbank loan prices, albeit the magnitude of the overprice and the impact on the access to interbank liquidity differ depending on the borrower-specific characteristics. More capitalized and liquid banks tend to pay less for liquidity—concurrent with evidence on market discipline—but also can absorb better the impact of exogenous liquidity shocks, suggesting benefits from capital and liquidity ratios. Our results suggest that lending relationships can alleviate funding costs during idiosyncratic liquidity shocks, while central bank liquidity contributes to smooth the impact of aggregate liquidity shocks. Results have implications for both financial stability and monetary policy transmission.

Keywords: interbank markets; market discipline; liquidity shocks; monetary policy; financial stability. (search for similar items in EconPapers)
JEL-codes: E43 E58 G12 G21 L14 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2019-01
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://repec.graduateinstitute.ch/pdfs/Working_papers/HEIDWP01-2019.pdf (application/pdf)

Related works:
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:gii:giihei:heidwp01-2019

Access Statistics for this paper

More papers in IHEID Working Papers from Economics Section, The Graduate Institute of International Studies Contact information at EDIRC.
Bibliographic data for series maintained by Dorina Dobre ().