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Liquidity Coinsurance and Bank Capital

Fabio Castiglionesi (), Fabio Feriozzi (), Gyöngyi Lóránth and Loriana Pelizzon ()

Journal of Money, Credit and Banking, 2014, vol. 46, issue 2-3, 409-443

Abstract: Banks can deal with their liquidity risk by holding liquid assets (self‐insurance), by participating in interbank markets (coinsurance), or by using flexible financing instruments, such as bank capital (risk sharing). We use a simple model to show that undiversifiable liquidity risk, that is, the liquidity risk that banks are unable to coinsure on interbank markets, represents an important risk factor affecting their capital structures. Banks facing higher undiversifiable liquidity risk hold more capital. We posit that, empirically, banks that are more exposed to undiversifiable liquidity risk are less active on interbank markets. Therefore, we test for the existence of a negative relationship between bank capital and interbank market activity and find support in a large sample of U.S. commercial banks.

Date: 2014
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https://doi.org/10.1111/jmcb.12111

Related works:
Working Paper: Liquidity coinsurance and bank capital (2014) Downloads
Working Paper: Liquidity coinsurance and bank capital (2014) Downloads
Working Paper: Liquidity Coinsurance and Bank Capital (2012) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:46:y:2014:i:2-3:p:409-443

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