Credit market competition and liquidity crises

Elena Carletti (elena.carletti@unibocconi.it) and Agnese Leonello

No 1932, Working Paper Series from European Central Bank

Abstract: We develop a model where banks invest in reserves and loans, and trade loans on the interbank market to deal with liquidity shocks. Two types of equilibria emerge, depending on the degree of credit market competition and the level of aggregate liquidity risk. In one equilibrium, all banks keep enough reserves and remain solvent. In the other, some banks default with positive probability. The latter equilibrium exists when competition is not too intense and high liquidity shocks are not too likely. The model delivers several implications concerning the severity of crises and credit availability along the business cycle. JEL Classification: G01, G20, G21

Keywords: cash-in-the-market pricing; interbank market; price volatility; systemic crises (search for similar items in EconPapers)
Date: 2016-07
New Economics Papers: this item is included in nep-ban and nep-com
Note: 2292323
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Credit Market Competition and Liquidity Crises (2019)
Working Paper: Credit Market Competition and Liquidity Crises (2014)
Working Paper: Credit Market Competition and Liquidity Crises (2013)
Working Paper: Credit Market Competition and Liquidity Crises (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20161932

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