The Price of Liquidity: Bank Characteristics and Market Conditions

Falko Fecht (), Kjell G. Nyborg () and Jörg Rocholl ()

No CESifo Working Paper No. 2576, CESifo Working Paper Series from CESifo Group Munich

Abstract: We study differences in the price paid for liquidity across banks using price data at the individual bank level. Unique to this paper, we also have data on individual banks’ reserve requirements and actual reserve holdings, thus allowing us to gauge the extent to which a bank is short or long liquidity. We find that the price a bank pays for liquidity depends on the liquidity positions of other banks, as well as its own. There is evidence that liquidity squeezes occasionally occur and short banks pay more the larger is the potential for a squeeze. The price paid for liquidity is decreasing in bank size and small banks are more adversely affected by an increased potential for a squeeze. Contrary to what one might expect, banks in formal liquidity networks do not pay less.

Keywords: liquidity; banking; squeezes; money markets; repo auctions (search for similar items in EconPapers)
JEL-codes: D44 E50 G10 G21 (search for similar items in EconPapers)
Date: 2009
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Working Paper: The price of liquidity: bank characteristics and market conditions (2008)
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