Advanced Search
MyIDEAS: Login to save this paper or follow this series

Liquidity risk, cash-flow constraints and systemic feedbacks

Contents:

Author Info

  • Kapadia, Sujit

    ()
    (Bank of England)

  • Drehmann, Mathias

    ()
    (Bank for International Settlements)

  • Elliott, John

    ()
    (Bank of England)

  • Sterne, Gabriel

    ()
    (Exotix)

Abstract

The endogenous evolution of liquidity risk is a key driver of financial crises. This paper models liquidity feedbacks in a quantitative model of systemic risk. The model incorporates a number of channels important in the current financial crisis. As banks lose access to longer-term funding markets, their liabilities become increasingly short term, further undermining confidence. Stressed banks’ defensive actions include liquidity hoarding and asset fire sales. This behaviour can trigger funding problems at other banks and may ultimately cause them to fail. In presenting results, we analyse scenarios in which these channels of contagion operate, and conduct illustrative simulations to show how liquidity feedbacks may markedly amplify distress.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2012/wp456.pdf
File Function: Full text
Download Restriction: no

Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 456.

as in new window
Length: 42 pages
Date of creation: 21 Jun 2012
Date of revision:
Handle: RePEc:boe:boeewp:0456

Contact details of provider:
Postal: Publications Group Bank of England Threadneedle Street London EC2R 8AH
Phone: +44 (0)171 601 4030
Fax: +44 (0)171 601 5196
Email:
Web page: http://www.bankofengland.co.uk/
More information through EDIRC

Related research

Keywords: Systemic risk; funding liquidity risk; contagion; stress testing;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Helmut Elsinger & Alfred Lehar & Martin Summer, 2002. "Risk Assessment for Banking Systems," Working Papers, Oesterreichische Nationalbank (Austrian Central Bank) 79, Oesterreichische Nationalbank (Austrian Central Bank).
  2. David Aikman & Piergiorgio Alessandri & Bruno Eklund & Prasanna Gai & Sujit Kapadia & Elizabeth Martin & Nada Mora & Gabriel Sterne & Matthew Willison, 2009. "Funding Liquidity Risk in a Quantitative Model of Systemic Stability," Working Papers Central Bank of Chile, Central Bank of Chile 555, Central Bank of Chile.
  3. Murillo Campello & Erasmo Giambona & John R. Graham & Campbell R. Harvey, 2011. "Liquidity Management and Corporate Investment During a Financial Crisis," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 24(6), pages 1944-1979.
  4. Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, INFORMS, vol. 47(2), pages 236-249, February.
  5. Upper, Christian, 2011. "Simulation methods to assess the danger of contagion in interbank markets," Journal of Financial Stability, Elsevier, Elsevier, vol. 7(3), pages 111-125, August.
  6. Acharya, Viral V & Merrouche, Ouarda, 2012. "Precautionary hoarding of liquidity and inter-bank markets: Evidence from the sub-prime crisis," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8859, C.E.P.R. Discussion Papers.
  7. Heider, Florian & Hoerova, Marie & Holthausen, Cornelia, 2010. "Liquidity Hoarding and Interbank Market Spreads: The Role of Counterparty Risk," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7762, C.E.P.R. Discussion Papers.
  8. Jens H. E. Christensen & Jose A. Lopez & Glenn D. Rudebusch, 2014. "Do Central Bank Liquidity Facilities Affect Interbank Lending Rates?," Journal of Business & Economic Statistics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 32(1), pages 136-151, January.
  9. Paolo Angelini & Andrea Nobili & Maria Cristina Picillo, 2009. "The interbank market after August 2007: what has changed, and why?," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 731, Bank of Italy, Economic Research and International Relations Area.
  10. Piergiorgio Alessandri & Prasanna Gai & Sujit Kapadia & Nada Mora & Claus Puhr, 2009. "Towards a Framework for Quantifying Systemic Stability," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 5(3), pages 47-81, September.
  11. Acharya, Viral V. & Skeie, David, 2011. "A model of liquidity hoarding and term premia in inter-bank markets," Journal of Monetary Economics, Elsevier, Elsevier, vol. 58(5), pages 436-447.
  12. Mathias Drehmann, 2002. "Will an optimal deposit insurance always increase financial stability?," Bonn Econ Discussion Papers, University of Bonn, Germany bgse28_2002, University of Bonn, Germany.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Mathias Drehmann & Kleopatra Nikolaou, 2010. "Funding liquidity risk: definition and measurement," BIS Working Papers 316, Bank for International Settlements.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:boe:boeewp:0456. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Publications Team).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.