Advanced Search
MyIDEAS: Login

Liquidity risk in banking: is there herding?

Contents:

Author Info

  • Diana Bonfim
  • Moshe Kim

Abstract

Banks individually optimize their liquidity risk management, often neglecting the externalities generated by their choices on the overall risk of the financial system. This is the main argument to support the regulation of liquidity risk. However, there may be incentives, related for instance to the role of the lender of last resort, for banks to optimize their choices not strictly at the individual level, but engaging instead in collective risk taking strategies, which may intensify systemic risk. In this paper we look for evidence of such herding behaviors, with an emphasis on the period preceding the global financial crisis. Herding is significant only among the largest banks, after adequately controlling for relevant endogeneity problems associated with the estimation of peer effects. This result suggests that the regulation of systemically important financial institutions may play an important role in mitigating this specific component of liquidity risk.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.bportugal.pt/en-US/BdP%20Publications%20Research/wp201218.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w201218.

as in new window
Length:
Date of creation: 2012
Date of revision:
Handle: RePEc:ptu:wpaper:w201218

Contact details of provider:
Postal: R. do Ouro, 27, 1100 LISBOA
Phone: 21 321 32 00
Fax: 21 346 48 43
Email:
Web page: http://www.bportugal.pt
More information through EDIRC

Related research

Keywords:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
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.:
as in new window
  1. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  2. 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.
  3. Douglas W. Diamond & Raghuram G. Rajan, 1999. "A Theory of Bank Capital," NBER Working Papers 7431, National Bureau of Economic Research, Inc.
  4. Tirole, Jean, 2009. "Illiquidity and All Its Friends," TSE Working Papers 09-083, Toulouse School of Economics (TSE), revised Feb 2010.
  5. Gary Gorton & Lixin Huang, 2002. "Liquidity, Efficiency and Bank Bailouts," Center for Financial Institutions Working Papers 02-33, Wharton School Center for Financial Institutions, University of Pennsylvania.
  6. Allen, Franklin & Babus, Ana & Carletti, Elena, 2011. "Asset Commonality, Debt Maturity and Systemic Risk," CEPR Discussion Papers 8476, C.E.P.R. Discussion Papers.
  7. Demirguc-Kunt, Asli & Huizinga, Harry, 2009. "Bank activity and funding strategies : the impact on risk and returns," Policy Research Working Paper Series 4837, The World Bank.
  8. Claudio Borio, 2009. "Ten propositions about liquidity crises," BIS Working Papers 293, Bank for International Settlements.
  9. Emmanuel Farhi & Mikhail Golosov & Aleh Tsyvinski, 2006. "A Theory of Liquidity and Regulation of Financial Intermediation," Levine's Bibliography 321307000000000326, UCLA Department of Economics.
  10. Grinblatt, Mark & Titman, Sheridan & Wermers, Russ, 1995. "Momentum Investment Strategies, Portfolio Performance, and Herding: A Study of Mutual Fund Behavior," American Economic Review, American Economic Association, vol. 85(5), pages 1088-1105, December.
  11. Scharfstein, David. & Stein, Jeremy C., 1988. "Herd behavior and investment," Working papers WP 2062-88., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  12. John R. Graham, 1999. "Herding among Investment Newsletters: Theory and Evidence," Journal of Finance, American Finance Association, vol. 54(1), pages 237-268, 02.
  13. Goodhart, Charles & Schoenmaker, Dirk, 1995. "Should the Functions of Monetary Policy and Banking Supervision Be Separated?," Oxford Economic Papers, Oxford University Press, vol. 47(4), pages 539-60, October.
  14. Enrico Perotti & Javier Suarez, 2011. "A Pigovian Approach to Liquidity Regulation," DNB Working Papers 291, Netherlands Central Bank, Research Department.
  15. Ryuichi Nakagawa & Hirofumi Uchida, 2004. "Herd Behavior In The Japanese Loan Market: Evidence From Bank Panel Data," Econometric Society 2004 Far Eastern Meetings 737, Econometric Society.
  16. Xavier Freixas & Antoine Martin & David Skeie, 2011. "Bank Liquidity, Interbank Markets, and Monetary Policy," Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2656-2692.
  17. Gara Afonso & Anna Kovner & Antoinette Schoar, 2010. "Stressed, not frozen: the Federal Funds market in the financial crisis," Staff Reports 437, Federal Reserve Bank of New York.
  18. Kim, Moshe & Kristiansen, Eirik Gaard & Vale, Bent, 2005. "Endogenous product differentiation in credit markets: What do borrowers pay for?," Journal of Banking & Finance, Elsevier, vol. 29(3), pages 681-699, March.
  19. Antoine Martin, 2006. "Liquidity provision vs. deposit insurance: preventing bank panics without moral hazard," Economic Theory, Springer, vol. 28(1), pages 197-211, 05.
  20. Charles F. Manski, 2000. "Economic Analysis of Social Interactions," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 115-136, Summer.
  21. Jean-Charles Rochet & Xavier Vives, 2004. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1116-1147, December.
  22. Acharya, Viral V., 2009. "A Theory of Systemic Risk and Design of Prudential Bank Regulation," CEPR Discussion Papers 7164, C.E.P.R. Discussion Papers.
  23. Allen, Franklin & Carletti, Elena, 2008. "The role of liquidity in financial crises," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 379-412.
  24. Viral V. Acharya & Hyun Song Shin & Tanju Yorulmazer, 2011. "Crisis Resolution and Bank Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 2166-2205.
  25. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
  26. Xavier Vives, 2012. "Strategic Complementarity, Fragility, and Regulation," 2012 Meeting Papers 789, Society for Economic Dynamics.
  27. Rochet, Jean-Charles & Tirole, Jean, 1996. "Interbank Lending and Systemic Risk," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 733-62, November.
  28. Ratnovski, Lev, 2009. "Bank liquidity regulation and the lender of last resort," Journal of Financial Intermediation, Elsevier, vol. 18(4), pages 541-558, October.
  29. Russ Wermers, 1999. "Mutual Fund Herding and the Impact on Stock Prices," Journal of Finance, American Finance Association, vol. 54(2), pages 581-622, 04.
  30. Huang, Rocco & Ratnovski, Lev, 2010. "The dark side of bank wholesale funding," Working Paper Series 1223, European Central Bank.
  31. Jain, Arvind K & Gupta, Satyadev, 1987. "Some Evidence on 'Herding' Behavior of U.S. Banks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(1), pages 78-89, February.
  32. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February.
  33. Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June.
  34. Douglas W. Diamond & Raghuram G. Rajan, 2003. "Liquidity Shortages and Banking Crises," NBER Working Papers 10071, National Bureau of Economic Research, Inc.
  35. Paolo Angelini & Andrea Nobili & Maria Cristina Picillo, 2009. "The interbank market after August 2007: what has changed, and why?," Temi di discussione (Economic working papers) 731, Bank of Italy, Economic Research and International Relations Area.
  36. Jin Cao & Gerhard Illing, 2010. "Regulation of systemic liquidity risk," Financial Markets and Portfolio Management, Springer, vol. 24(1), pages 31-48, March.
  37. Ioannidou, V. & Penas, M.F., 2008. "Deposit Insurance and Bank Risk-Taking: Evidence from Internal Loan Ratings," Discussion Paper 2008-022, Tilburg University, Tilburg Law and Economic Center.
  38. Thomas B. King, 2008. "Discipline and Liquidity in the Interbank Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(2-3), pages 295-317, 03.
  39. Frank Milne, 2008. "Credit Crises, Risk Management Systems and Liquidity Modelling," Working Papers 1, John Deutsch Institute for the Study of Economic Policy.
  40. Scott E. Carrell & Richard L. Fullerton & James E. West, 2009. "Does Your Cohort Matter? Measuring Peer Effects in College Achievement," Journal of Labor Economics, University of Chicago Press, vol. 27(3), pages 439-464, 07.
  41. Jin Cao & Gerhard Illing, 2011. "Endogenous Exposure to Systemic Liquidity Risk," International Journal of Central Banking, International Journal of Central Banking, vol. 7(2), pages 173-216, June.
  42. Viral V. Acharya & Tanju Yorulmazer, 2008. "Information Contagion and Bank Herding," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(1), pages 215-231, 02.
  43. Wagner, Wolf, 2007. "The liquidity of bank assets and banking stability," Journal of Banking & Finance, Elsevier, vol. 31(1), pages 121-139, January.
  44. Allen N. Berger & Christa H. S. Bouwman, 2009. "Bank Liquidity Creation," Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3779-3837, September.
  45. Bruche, Max & Suarez, Javier, 2010. "Deposit insurance and money market freezes," Journal of Monetary Economics, Elsevier, vol. 57(1), pages 45-61, January.
  46. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
  47. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W., 1992. "The impact of institutional trading on stock prices," Journal of Financial Economics, Elsevier, vol. 32(1), pages 23-43, August.
  48. Wagner, Wolf, 2007. "Aggregate liquidity shortages, idiosyncratic liquidity smoothing and banking regulation," Journal of Financial Stability, Elsevier, vol. 3(1), pages 18-32, April.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Anolli, Mario & Beccalli, Elena & Molyneux, Philip, 2014. "Bank earnings forecasts, risk and the crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 309-335.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ptu:wpaper:w201218. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (DEE-NTDD).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.