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The Price of Liquidity: Bank Characteristics and Market Conditions

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  • Falko Fecht
  • Kjell G. Nyborg
  • Jörg Rocholl

Abstract

We study differences in the price paid for liquidity across banks using price data at the individual bank level. Unique to this paper, we also have data on individual banks’ reserve requirements and actual reserve holdings, thus allowing us to gauge the extent to which a bank is short or long liquidity. We find that the price a bank pays for liquidity depends on the liquidity positions of other banks, as well as its own. There is evidence that liquidity squeezes occasionally occur and short banks pay more the larger is the potential for a squeeze. The price paid for liquidity is decreasing in bank size and small banks are more adversely affected by an increased potential for a squeeze. Contrary to what one might expect, banks in formal liquidity networks do not pay less.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2576.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2576

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Keywords: liquidity; banking; squeezes; money markets; repo auctions;

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References

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Citations

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Cited by:
  1. Viral V. Acharya & Ouarda Merrouche, 2013. "Precautionary Hoarding of Liquidity and Interbank Markets: Evidence from the Subprime Crisis," Review of Finance, European Finance Association, European Finance Association, vol. 17(1), pages 107-160.
  2. Abbassi, Puriya & Fecht, Falko & Weber, Patrick, 2013. "How stressed are banks in the interbank market?," Discussion Papers 40/2013, Deutsche Bundesbank, Research Centre.
  3. Nyborg, Kjell G & Östberg, Per, 2010. "Money and Liquidity in Financial Markets," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7905, C.E.P.R. Discussion Papers.
  4. Eisenschmidt, Jens & Hirsch, Astrid & Linzert, Tobias, 2009. "Bidding behaviour in the ECB’s main refinancing operations during the financial crisis," Working Paper Series, European Central Bank 1052, European Central Bank.
  5. Sébastien Philippe Kraenzlin & Benedikt von Scarpatetti, 2011. "Bargaining Power in the Repo Market," Working Papers 2011-14, Swiss National Bank.
  6. Craig, Ben R. & Fecht, Falko & Tümer-Alkan, Günseli, 2013. "The role of interbank relationships and liquidity needs," Discussion Papers 54/2013, Deutsche Bundesbank, Research Centre.

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