Liquidity coinsurance and bank capital
AbstractBanks can deal with their liquidity risk by holding liquid assets (self-insurance), by participating in interbank markets (coinsurance), or by using flexible financing instruments, such as bank capital (risk-sharing). We use a simple model to show that undiversi fiable liquidity risk, i.e. the liquidity risk that banks are unable to coinsure on interbank markets, represents an important risk factor affecting their capital structures. Banks facing higher undiversi fiable liquidity risk hold more capital. We posit that empirically banks that are more exposed to undiversifi able liquidity risk are less active on interbank markets. Therefore, we test for the existence of a negative relationship between bank capital and interbank market activity and find support in a large sample of U.S. commercial banks. --
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Bibliographic InfoPaper provided by Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt in its series SAFE Working Paper Series with number 45.
Date of creation: 2014
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Bank Capital; Interbank Markets; Liquidity Coinsurance;
Other versions of this item:
- 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-2014-03-30 (All new papers)
- NEP-BAN-2014-03-30 (Banking)
- NEP-IAS-2014-03-30 (Insurance Economics)
- NEP-RMG-2014-03-30 (Risk Management)
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