Liquidity matters: Evidence from the Russian interbank market

Alexei Kares (), Koen Schoors and Gleb Lanine
Additional contact information
Alexei Kares: BOFIT, Postal: Bank of Finland, BOFIT, P.O. Box 160, FI-00101 Helsinki, Finland
Gleb Lanine: BOFIT, Postal: Bank of Finland, BOFIT, P.O. Box 160, FI-00101 Helsinki, Finland

No 19/2008, BOFIT Discussion Papers from Bank of Finland, Institute for Economies in Transition

Abstract: We suggest an additional transmission channel of contagion on the interbank market - the liquidity channel. Examining the Russian banking sector, we and that the liquidity channel contributes significantly to understanding and predicting interbank market crises. Interbank market stability Granger causes the interbank market structure, while the opposite causality is rejected. This bolsters the view that the interbank market structure is endogenous. The results corroborate the thesis that prudential regulation at the individual bank level is insufficient to prevent systemic crises. We demonstrate that liquidity injections of a classical lender of last resort can effectively mitigate coordination failures on the interbank market both in theory and practice. Apparently, liquidity does matter.

Keywords: interbank market stability; contagion; liquidity channel; lender of last resort; Russia (search for similar items in EconPapers)
JEL-codes: C80 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cis, nep-mon and nep-tra
Date: 2008-11-21
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Working Paper: Liquidity matters: Evidence from the Russian interbank market (2008)
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