Working Paper: CEPR ID: DP9162
Authors: Fabio Castiglionesi; Fabio Feriozzi; Gyngyi Lrnth; Loriana Pelizzon
Abstract: Banks can deal with their liquidity risk by holding liquid assets (self-insurance), by participating in the interbank market (coinsurance), or by using flexible financing instruments, such as bank capital (risk-sharing). We study how the access to an interbank market affectsbanks' incentive to hold capital. A general insight is that from a risk-sharing perspective it is optimal to postpone payouts to capital investors when a bank is hit by a liquidity shock that it cannot coinsure on the interbank market. This mechanism produces a negative relationship between interbank activity and bank capital. We provide empirical support for this prediction in a large sample of U.S. commercial banks, as well as in a sample of European and Japanese commercial banks.
Keywords: Bank Capital; Interbank Markets; Liquidity Coinsurance
JEL Codes: G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Bank capital (G21) | Liquidity risk management (G33) |
| Interbank activity (G21) | Liquidity risk transfer to risk-neutral investors (G19) |
| Interbank market presence (G21) | Bank capital (G21) |
| Bank capital (G21) | Interbank activity (G21) |