Liquidity coinsurance and bank capital
Fabio Castiglionesi (),
Fabio Feriozzi (),
Gyöngyi Lóránth and
Loriana Pelizzon ()
No 45, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE
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 undiversi fiable liquidity risk, i.e. the liquidity risk that banks are unable to coinsure on interbank markets, represents an important risk factor affecting their capital structures. Banks facing higher undiversi fiable liquidity risk hold more capital. We posit that empirically banks that are more exposed to undiversifi able 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.
Keywords: Bank Capital; Interbank Markets; Liquidity Coinsurance (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-ias and nep-rmg
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Journal Article: Liquidity Coinsurance and Bank Capital (2014)
Working Paper: Liquidity coinsurance and bank capital (2014)
Working Paper: Liquidity Coinsurance and Bank Capital (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:45
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