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When liquidity risk becomes a macro-prudential issue: Empirical evidence of bank behaviour

  • Jan Willem van den End
  • Mostafa Tabbae

This paper provides empirical evidence of behavioural responses by banks and their contribution to system-wide liquidity stress. Using firm-specific balance sheet data, we construct aggregate indicators of macro-prudential risk. Measures of size and herding show that balance sheet adjustments have been pro-cyclical in the crisis, while responses became increasingly dependent across banks and concentrated on certain market segments. Banks' reactions were shaped by decreased risk tolerance and limited flexibility in risk management. Regression analysis confirms that their behaviour contributed to financial sector stress. The behavioural measures are useful tools for monetary and macro prudential analyses and can improve the micro foundations of financial stability models.��Â

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File URL: http://www.dnb.nl/binaries/230%20When%20liquidity%20risk%20becomes%20a%20macro-prudential%20issue_tcm46-225546.pdf
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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 230.

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Date of creation: Dec 2009
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Handle: RePEc:dnb:dnbwpp:230
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  4. Claudio Borio & Mathias Drehmann, 2011. "Toward an Operational Framework for Financial Stability: “Fuzzy” Measurement and Its Consequences," Central Banking, Analysis, and Economic Policies Book Series, in: Rodrigo Alfaro (ed.), Financial Stability, Monetary Policy, and Central Banking, edition 1, volume 15, chapter 4, pages 063-123 Central Bank of Chile.
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  17. Mathias Drehmann & Kleopatra Nikolaou, 2010. "Funding liquidity risk: definition and measurement," BIS Working Papers 316, Bank for International Settlements.
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