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Liquidity matters: Evidence from the Russian interbank market

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  • A. KARAS

    ()

  • K. SCHOORS
  • G. LANINE

Abstract

We suggest a new transmission channel of contagion on the interbank market, namely the liquidity channel. We apply this idea to the Russian banking sector and .nd that the liquidity channel contributes signi.cantly to a better understanding and prediction of actual interbank market crises. Interbank market stability Granger causes the interbank market struc- ture, while the opposite causality is rejected. This emboldens the case for viewing the interbank market structure as endogenous. The results corroborate the thesis that prudential regulation at individual bank level is insu¢ cient to prevent systemic crises. We demonstrate that liquidity injections of a classical LOLR can e¤ectively mitigate coordination fail- ures on the interbank market not only in theory, but also in practice. In short: liquidity matters.

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Bibliographic Info

Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 08/520.

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Length: 21 pages
Date of creation: Jun 2008
Date of revision:
Handle: RePEc:rug:rugwps:08/520

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Keywords: interbank market stability; contagion; liquidity channel; lender of last resort; Russia;

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References

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Citations

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Cited by:
  1. Leonidov, A. & Rumyantsev, E., 2013. "Russian Interbank Systemic Risks Assessment from the Network Topology Point of View," Journal of the New Economic Association, New Economic Association, vol. 19(3), pages 65-80.
  2. Fungachova, Z. & Solanko, L., 2010. "Has Banks’ Financial Intermediation Improved in Russia?," Journal of the New Economic Association, New Economic Association, issue 8, pages 101-116.
  3. Degryse, H.A. & Elahi, M.A. & Penas, M.F., 2012. "Determinants of Banking System Fragility: A Regional Perspective," Discussion Paper 2012-015, Tilburg University, Center for Economic Research.
  4. Grzegorz Hałaj & Christoffer Kok, 2013. "Assessing interbank contagion using simulated networks," Computational Management Science, Springer, vol. 10(2), pages 157-186, June.
  5. Andrievskaya, Irina & Semenova , Maria, 2013. "Market discipline and the Russian interbank market," BOFIT Discussion Papers 29/2013, Bank of Finland, Institute for Economies in Transition.
  6. Fidrmuc, Jarko & Süß, Philipp Johann, 2009. "The Outbreak of the Russian Banking Crisis," Discussion Papers in Economics 10996, University of Munich, Department of Economics.

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