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Measuring heterogeneity in bank liquidity risk: Who are the winners and losers?

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  • Jean-Loup, Soula

Abstract

The 2007–2009 crisis stressed the importance of liquidity for banks. Aggregate liquidity indices provide an account of financial market liquidity conditions. However, these indices do not illustrate how banks individually are affected by such conditions. Similarly, balance sheet indicators only reflect degrees of potential bank exposure to liquidity shocks. Using a risk factor model, we present a way of measuring bank sensitivity to liquidity risk. Our results indicate that liquidity risk is a specific risk, and we shed light on heterogeneities among banks in terms of their exposure to liquidity risk. Liquidity conditions can hinder or benefit banks, and banks can also be insensitive to such conditions. We document large variations in exposure levels across the 2008 and 2011 crises. Larger size and higher capital levels insulate banks from aggregate liquidity risk. However, deposit shares, wholesale funding reliance and funding gaps affect only those banks benefiting from aggregate liquidity risk. These ratios reveal bank liquidity production levels. This suggests that market discipline applies to liquidity production, but only for less risky banks in cases of liquidity crisis. Thus, market discipline appears to be one-sided. This reinforces the necessity of liquidity requirements for all banks as illustrated from the Basel III liquidity ratios.

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  • Jean-Loup, Soula, 2017. "Measuring heterogeneity in bank liquidity risk: Who are the winners and losers?," The Quarterly Review of Economics and Finance, Elsevier, vol. 66(C), pages 302-313.
  • Handle: RePEc:eee:quaeco:v:66:y:2017:i:c:p:302-313
    DOI: 10.1016/j.qref.2017.04.006
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    1. repec:eee:quaeco:v:71:y:2019:i:c:p:161-175 is not listed on IDEAS
    2. repec:eee:finana:v:54:y:2017:i:c:p:23-38 is not listed on IDEAS
    3. repec:rom:rmcimn:v:18:y:2017:i:4:p:421-443 is not listed on IDEAS

    More about this item

    Keywords

    Bank risk management; Liquidity risk; Systemic risk;

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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