Liquidity matters: Evidence from the Russian interbank market
AbstractWe suggest an additional transmission channel of contagion on the interbank market - the liquidity channel. Examining the Russian banking sector, we and that the liquidity channel contributes significantly to understanding and predicting interbank market crises. Interbank market stability Granger causes the interbank market structure, while the opposite causality is rejected. This bolsters the view that the interbank market structure is endogenous. The results corroborate the thesis that prudential regulation at the individual bank level is insufficient to prevent systemic crises. We demonstrate that liquidity injections of a classical lender of last resort can effectively mitigate coordination failures on the interbank market both in theory and practice. Apparently, liquidity does matter.
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Bibliographic InfoPaper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 19/2008.
Length: 27 pages
Date of creation: 21 Nov 2008
Date of revision:
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interbank market stability; contagion; liquidity channel; lender of last resort; Russia;
Other versions of this item:
- A. Karas & K. Schoors & G. Lanine, 2008. "Liquidity matters: Evidence from the Russian interbank market," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 08/520, Ghent University, Faculty of Economics and Business Administration.
- C80 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - General
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-12-01 (All new papers)
- NEP-BAN-2008-12-01 (Banking)
- NEP-CIS-2008-12-01 (Confederation of Independent States)
- NEP-MON-2008-12-01 (Monetary Economics)
- NEP-TRA-2008-12-01 (Transition Economics)
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