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Liquidity (risk) concepts - definitions and interactions

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Author Info
Kleopatra Nikolaou () (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
Abstract

We discuss the notion of liquidity and liquidity risk within the financial system. We distinguish between three different liquidity types, central bank liquidity, funding and market liquidity and their relevant risks. In order to understand the workings of financial system liquidity, as well as the role of the central bank, we bring together relevant literature from different areas and review liquidity linkages among these three types in normal and turbulent times. We stress that the root of liquidity risk lies in information asymmetries and the existence of incomplete markets. The role of central bank liquidity can be important in managing a liquidity crisis, yet it is not a panacea. It can act as an immediate but temporary buffer to liquidity shocks, thereby allowing time for supervision and regulation to confront the causes of liquidity risk. JEL Classification: G10, G20.

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Paper provided by European Central Bank in its series Working Paper Series with number 1008.

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Length: 72 pages
Date of creation: Feb 2009
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Handle: RePEc:ecb:ecbwps:20091008

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Keywords: liquidity; risk; central bank; LLR.;

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Cited by:
(explanations, 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.)

  1. Jens Eisenschmidt & Astrid Hirsch & Tobias Linzert, 2009. "Bidding behaviour in the ECB's main refinancing operations during the financial crisis," Working Paper Series 1052, European Central Bank. [Downloadable!]
  2. Thomas Y. Mathä & Olivier Pierrard, 2009. "Search in the Product Market and the Real Business Cycle," Working Paper Series 1036, European Central Bank. [Downloadable!]
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  3. Luca Agnello & Ricardo M. Sousa, 2009. "The determinants of public deficit volatility," Working Paper Series 1042, European Central Bank. [Downloadable!]
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