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Bank's Liquidity Demand in the Presence of a Lender of Last Resort

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  • Martin Gonzalez Eiras

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    (Department of Economics, Universidad de San Andres)

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    Abstract

    I use a natural experiment to estimate the effect that a Lender of Last Resort has on banks’ liquidity demand. In December 1996 Argentina’s Central Bank signed with a group of international banks a contingent credit line agreement that enhanced its ability to act as a LLR. I run difference-in-difference regressions of the effect of the announcement of the insurance contract on banks’ liquidity holdings, using ownership status and size to identify the groups of treatment and control banks. Finally I rule out general equilibrium feedback effects through the interbank market between control and treatment banks. Results indicate a reduction of approximately 6.7 percentage points in banks’ liquidity holdings in the presence of a LLR.

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    File URL: ftp://webacademicos.udesa.edu.ar/pub/econ/doc61.pdf
    File Function: First version, 2003
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    Bibliographic Info

    Paper provided by Universidad de San Andres, Departamento de Economia in its series Working Papers with number 61.

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    Length: 35 pages
    Date of creation: Sep 2003
    Date of revision: Sep 2003
    Handle: RePEc:sad:wpaper:61

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    Keywords: banks; liquidity; demand; lender; last resort;

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    References

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    1. Anil K. Kashyap & Raghuram Rajan & Jeremy C. Stein, 1999. "Banks as Liquidity Providers: An Explanation for the Co-Existence of Lending and Deposit-Taking," NBER Working Papers 6962, National Bureau of Economic Research, Inc.
    2. Caprio, Gerard Jr. & Dooley, Michael & Leipziger, Danny & Walsh, Carl, 1996. "The lender of last resort function under a currency board : the case of Argentina," Policy Research Working Paper Series 1648, The World Bank.
    3. Guillermo Alger & Ingela Alger, 1999. "Liquid Assets in Banks: Theory and Practice," Boston College Working Papers in Economics 446, Boston College Department of Economics.
    4. Joshua Angrist & Alan Krueger, 1998. "Empirical Strategies in Labor Economics," Working papers 98-7, Massachusetts Institute of Technology (MIT), Department of Economics.
    5. Rochet, Jean-Charles & Vives, Xavier, 2002. "Coordination failures and the lender of last resort : was Bagehot right after all?," HWWA Discussion Papers 184, Hamburg Institute of International Economics (HWWA).
    6. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
    7. Bengt Holmstrom & Jean Tirole, 1996. "Private and Public Supply of Liquidity," NBER Working Papers 5817, National Bureau of Economic Research, Inc.
    8. Miron, Jeffrey A, 1986. "Financial Panics, the Seasonality of the Nominal Interest Rate, and theFounding of the Fed," American Economic Review, American Economic Association, vol. 76(1), pages 125-40, March.
    9. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, December.
    10. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
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    Cited by:
    1. Repullo, Rafael, 2005. "Liquidity, Risk Taking, and the Lender of Last Resort," MPRA Paper 826, University Library of Munich, Germany.
    2. Eduardo Levy Yeyati & Alain Ize, 2005. "Financial De-Dollarization," IMF Working Papers 05/187, International Monetary Fund.
    3. Acharya, Viral & Song Shin, Hyun & Yorulmazer, Tanju, 2009. "Endogenous choice of bank liquidity: the role of fire sales," Bank of England working papers 376, Bank of England.
    4. Ratnovski, Lev, 2013. "Liquidity and transparency in bank risk management," Journal of Financial Intermediation, Elsevier, vol. 22(3), pages 422-439.
    5. Roberto Cortes Conde, 2008. "Spanish America Colonial Patterns: The Rio de La Plata," Working Papers 96, Universidad de San Andres, Departamento de Economia, revised Mar 2008.
    6. Acharya, Viral V & Shin, Hyun Song & Yorulmazer, Tanju, 2007. "Fire Sales, Foreign Entry and Bank Liquidity," CEPR Discussion Papers 6309, C.E.P.R. Discussion Papers.

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