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The Price of Liquidity: Bank Characteristics and Market Conditions

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  • Fecht, Falko
  • Nyborg, Kjell G
  • Rocholl, Jörg

Abstract

We identify frictions in the market for liquidity as well as bank-specific and market-wide factors that affect the prices that banks pay for liquidity, captured here by borrowing rates in repos with the central bank and benchmarked by the overnight index swap. We have price data at the individual bank level and, unique to this paper, 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. Healthier banks pay less, but contrary to what one might expect, banks in formal liquidity networks do not.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7794.

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Date of creation: Apr 2010
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Handle: RePEc:cpr:ceprdp:7794

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Keywords: banks; financial health; liquidity; money markets; repos; short squeezing;

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References

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Citations

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Cited by:
  1. Abbassi, Puriya & Fecht, Falko & Weber, Patrick, 2013. "How stressed are banks in the interbank market?," Discussion Papers 40/2013, Deutsche Bundesbank, Research Centre.
  2. Eisenschmidt, Jens & Hirsch, Astrid & Linzert, Tobias, 2009. "Bidding behaviour in the ECB’s main refinancing operations during the financial crisis," Working Paper Series 1052, European Central Bank.
  3. 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.
  4. Kjell G. NYBORG & Per OSTBERG, 2009. "Money and Liquidity in Financial Markets," Swiss Finance Institute Research Paper Series 10-25, Swiss Finance Institute, revised Jun 2010.
  5. Acharya, Viral V & Merrouche, Ouarda, 2012. "Precautionary hoarding of liquidity and inter-bank markets: Evidence from the sub-prime crisis," CEPR Discussion Papers 8859, C.E.P.R. Discussion Papers.
  6. Sébastien Philippe Kraenzlin & Benedikt von Scarpatetti, 2011. "Bargaining Power in the Repo Market," Working Papers 2011-14, Swiss National Bank.

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