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When liquidity risk becomes a macro-prudential issue: Empirical evidence of bank behaviour

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  • Jan Willem van den End
  • Mostafa Tabbae

Abstract

This paper provides empirical evidence of behavioural responses by banks and their contribution to system-wide liquidity stress. Using firm-specific balance sheet data, we construct aggregate indicators of macro-prudential risk. Measures of size and herding show that balance sheet adjustments have been pro-cyclical in the crisis, while responses became increasingly dependent across banks and concentrated on certain market segments. Banks' reactions were shaped by decreased risk tolerance and limited flexibility in risk management. Regression analysis confirms that their behaviour contributed to financial sector stress. The behavioural measures are useful tools for monetary and macro prudential analyses and can improve the micro foundations of financial stability models.��Â

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 230.

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Date of creation: Dec 2009
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Handle: RePEc:dnb:dnbwpp:230

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Keywords: banking; financial stability; stress-tests; liquidity risk.;

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Citations

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Cited by:
  1. Leo de Haan & Jan Willem van den End, 2011. "Banks' responses to funding liquidity shocks: lending adjustment, liquidity hoarding and fire sales," DNB Working Papers 293, Netherlands Central Bank, Research Department.
  2. Memmel, Christoph & Sachs, Angelika, 2011. "Contagion in the interbank market and its determinants," Discussion Paper Series 2: Banking and Financial Studies 2011,17, Deutsche Bundesbank, Research Centre.
  3. Eleonora Iachini & Stefano Nobili, 2014. "An indicator of systemic liquidity risk in the Italian financial markets," Questioni di Economia e Finanza (Occasional Papers) 217, Bank of Italy, Economic Research and International Relations Area.
  4. Leo de Haan & Jan Willem van den End, 2012. "Bank liquidity, the maturity ladder, and regulation," DNB Working Papers 346, Netherlands Central Bank, Research Department.
  5. Engineer, Merwan H. & Schure, Paul & Gillis, Mark, 2013. "A positive analysis of deposit insurance provision: Regulatory competition among European Union countries," Journal of Financial Stability, Elsevier, vol. 9(4), pages 530-544.
  6. Nguyen, Vu Hong Thai & Boateng, Agyenim, 2013. "The impact of excess reserves beyond precautionary levels on Bank Lending Channels in China," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 358-377.

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