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Liquidity risk and policy options

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  • Maddaloni, Giuseppe

Abstract

On the basis of a liquidity management model, liquidity risks, defined as the probability of payment failures in a real-time gross settlement (RTGS) payment system, may either stem from liquidity management inefficiencies or insufficient cash balances. I will show that penalties charged on the amount of payment failures minimise liquidity risks without interfering with the bank’s technology preferences. I will instead show that liquidity requirements, although as effective as penalties to contain the risk of liquidity shortage, may distort the bank’s technology preferences and cannot stem liquidity management inefficiencies. I will also show that liquidity risks within RTGS payment systems are potentially smaller because they depend more on the liquidity management efficiency than on the randomness of cash inflows and outflows.

Suggested Citation

  • Maddaloni, Giuseppe, 2015. "Liquidity risk and policy options," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 514-527.
    • Handle: RePEc:eee:jbfina:v:50:y:2015:i:c:p:514-527
    DOI: 10.1016/j.jbankfin.2014.01.018
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    More about this item

    Keywords

    Liquidity risk; Penalty rate; Liquidity requirement; Liquidity management; Payment system; Financial regulation; Policy;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G2 - Financial Economics - - Financial Institutions and Services
    • K2 - Law and Economics - - Regulation and Business Law

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