Strategic complementarity in banks’ funding liquidity choices and financial stability

André Silva

No 19, ESRB Working Paper Series from European Systemic Risk Board

Abstract: This paper examines whether banks’ liquidity and maturity mismatch decisions are affected by the choices of competitors and the impact of these coordinated funding liquidity policies on financial stability. Using a novel identification strategy where interactions are structured through decision networks, I show that banks do consider their peers’ liquidity choices when determining their own. This effect is asymmetric and not present in bank capital choices. Importantly, I find that these strategic funding liquidity decisions increase both individual banks’ default risk and overall systemic risk. From a macroprudential perspective, the results highlight the importance of explicitly regulating systemic liquidity risk. JEL Classification: G20, G21, G28

Keywords: financial stability; funding liquidity risk; macroprudential policy (search for similar items in EconPapers)
Date: 2016-07
New Economics Papers: this item is included in nep-ban and nep-rmg
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:srk:srkwps:201619

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