The consequences of liquidity imbalance: When net lenders leave interbank markets

Aneta Hryckiewicz and Lukasz Kozlowski

Journal of Financial Stability, 2018, vol. 36, issue C, 82-97

Abstract: The level as well as fluency of capital supply on the interbank market is crucial for banking sector liquidity. However, the dominance of individual players on this market leads to liquidity imbalance and, thus, might increase the risk for other banks. We test how different bank exposures in interbank market translates into other bank liquidity risk and credit supply. To this end, we use 207 bank exits from interbank markets between 1997 and 2013 in 52 emerging and developed countries. We find that the withdrawal of a bank with high net exposure on interbank market leads to a statistically significant drop in the liquidity position of the remaining banks. The effect is also economically significant. Finally, we find that a liquidity imbalance adversely affects the bank credit supply. Our findings suggest that the consequences are more severe for banks heavily relying on the local interbank market, for emerging countries and surprisingly in pre-crisis periods.

Keywords: Foreign banks; Liquidity imbalance; Bank exits; Interbank market (search for similar items in EconPapers)
JEL-codes: D47 G01 G12 G21 G28 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:36:y:2018:i:c:p:82-97

DOI: 10.1016/j.jfs.2018.02.002

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