Liquidity shocks and interbank market failures: the role of deposit flights, non-performing loans, and competition
Demian Macedo () and
Victor Troster ()
Additional contact information
Demian Macedo: Universitat de les Illes Balears
Journal of Economic Interaction and Coordination, 2021, vol. 16, issue 4, No 1, 705-746
Abstract Banks may be reluctant to remove bad loans from their portfolios during liquidity shortfalls, giving rise to a moral hazard problem. In this paper, we analyze how liquidity shortages affect the ability of the interbank market to provide liquidity in a moral hazard setting. We distinguish two types of liquidity shocks that arise due to a deposit flight (a contraction in the deposit supply) or to a cash-flow shock (an increase in the non-performing loans). We show that the source of a liquidity shortfall is the main determinant of the decision of banks to stop lending in the interbank market, rather than the extra amount of funds that banks need to cover. An increase in the non-performing loans has more adverse effects on balance sheets than a deposit flight. We also demonstrate that competition has a dual effect on financial stability. Interbank competition enhances financial stability by reducing the liquidity provision cost, whereas credit market competition worsens financial stability by inducing banks to take riskier profiles.
Keywords: Liquidity shocks; Interbank market; Deposit flights; Non-performing loans; Credit market competition; Moral hazard (search for similar items in EconPapers)
JEL-codes: D82 G00 G01 G21 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
http://link.springer.com/10.1007/s11403-021-00326-5 Abstract (text/html)
Access to the full text of the articles in this series is restricted.
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:spr:jeicoo:v:16:y:2021:i:4:d:10.1007_s11403-021-00326-5
Ordering information: This journal article can be ordered from
http://www.springer. ... ry/journal/11403/PS2
Access Statistics for this article
Journal of Economic Interaction and Coordination is currently edited by A. Namatame, Thomas Lux and Shu-Heng Chen
More articles in Journal of Economic Interaction and Coordination from Springer, Society for Economic Science with Heterogeneous Interacting Agents Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().