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Liquidity Coinsurance and Bank Capital

Author

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  • Castiglionesi, Fabio
  • Feriozzi, Fabio
  • Lóránth, Gyöngyi
  • Pelizzon, Loriana

Abstract

Banks can deal with their liquidity risk by holding liquid assets (self-insurance), by participating in the interbank market (coinsurance), or by using flexible financing instruments, such as bank capital (risk-sharing). We study how the access to an interbank market affects banks' incentive to hold capital. A general insight is that from a risk-sharing perspective it is optimal to postpone payouts to capital investors when a bank is hit by a liquidity shock that it cannot coinsure on the interbank market. This mechanism produces a negative relationship between interbank activity and bank capital. We provide empirical support for this prediction in a large sample of U.S. commercial banks, as well as in a sample of European and Japanese commercial banks.

Suggested Citation

  • Castiglionesi, Fabio & Feriozzi, Fabio & Lóránth, Gyöngyi & Pelizzon, Loriana, 2012. "Liquidity Coinsurance and Bank Capital," CEPR Discussion Papers 9162, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9162
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    References listed on IDEAS

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    Cited by:

    1. Beccalli, Elena & Frantz, Pascal, 2016. "Why are some banks recapitalized and others taken over?," LSE Research Online Documents on Economics 67305, London School of Economics and Political Science, LSE Library.
    2. Beccalli, Elena & Frantz, Pascal, 2016. "Why are some banks recapitalized and others taken over?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 45(C), pages 79-95.
    3. Kasinger, Johannes & Pelizzon, Loriana, 2018. "Financial stability in the EU: A case for micro data transparency," SAFE Policy Letters 67, Goethe University Frankfurt, Research Center SAFE - Sustainable Architecture for Finance in Europe.
    4. Jose Fique, 2016. "A Microfounded Design of Interconnectedness-Based Macroprudential Policy," Staff Working Papers 16-6, Bank of Canada.
    5. Fabio Castiglionesi & Fabio Feriozzi & Guido Lorenzoni, 2017. "Financial Integration and Liquidity Crises," NBER Working Papers 23359, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Bank Capital; Interbank Markets; Liquidity Coinsurance.;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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