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A New Liquidity Risk Measure for the Chilean Banking Sector

Listed author(s):
  • Sebastián Becerra
  • Gregory Claeys
  • Juan Francisco Martínez

The objective of this work is to construct an appropriate measure of liquidity risk for Chilean banks. There are already several measures of liquidity risk in the literature. Most of these metrics are based on specific assumptions and expert opinion. In order to overcome the potential problems associated with discretionary assumptions, and to exploit the information available, similar to the work of Drehman and Nikolaou (2012), we propose a metric based on the behavior of banks in the procurement operations Chilean open market (OMO). Due to the particularities of the implementation of monetary policy of the Chilean economy, we introduce an adaptation of the original metric. We calculate the liquidity indicator at an aggregate level and for a sample of groups of banks in a period that includes the recent crisis in the sub-prime. After that, we compare this indicator with a variety of standard metrics proposed in the literature. We find that our metric reasonably captures episodes of liquidity crises and therefore can be used as a complementary tool in the assessment of systemic risks.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 746.

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Date of creation: Feb 2015
Handle: RePEc:chb:bcchwp:746
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  1. 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.
  2. Välimäki, Tuomas, 2006. "Why the marginal MRO rate exceeds the ECB policy rate?," Research Discussion Papers 20/2006, Bank of Finland.
  3. Borio, Claudio & Zhu, Haibin, 2012. "Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?," Journal of Financial Stability, Elsevier, vol. 8(4), pages 236-251.
  4. Kjell G. Nyborg, 2004. "Multiple Unit Auctions and Short Squeezes," Review of Financial Studies, Society for Financial Studies, vol. 17(2), pages 545-580.
  5. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
  6. Pablo Federico, 2012. "Developing an Index of Liquidity-Risk Exposure: An Application to Latin American and Caribbean Banking Systems," Research Department Publications 4811, Inter-American Development Bank, Research Department.
  7. Valentina Bruno & Hyun Song Shin, 2013. "Capital Flows, Cross-Border Banking and Global Liquidity," NBER Working Papers 19038, National Bureau of Economic Research, Inc.
  8. repec:pri:cepsud:237a%20shin is not listed on IDEAS
  9. Cornett, Marcia Millon & McNutt, Jamie John & Strahan, Philip E. & Tehranian, Hassan, 2011. "Liquidity risk management and credit supply in the financial crisis," Journal of Financial Economics, Elsevier, vol. 101(2), pages 297-312, August.
  10. repec:idb:brikps:77978 is not listed on IDEAS
  11. Rodrigo Alfaro & Helmut Franken & Carlos García & Alejandro Jara, 2003. "Bank Lending Channel and the Monetary Transmission Mechanism: the Case of Chile," Working Papers Central Bank of Chile 223, Central Bank of Chile.
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