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Liquidity (risk) concepts: definitions and interactions

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  • Nikolaou, Kleopatra

Abstract

We discuss the notion of liquidity and liquidity risk within the financial system. We distinguish between three different liquidity types, central bank liquidity, funding and market liquidity and their relevant risks. In order to understand the workings of financial system liquidity, as well as the role of the central bank, we bring together relevant literature from different areas and review liquidity linkages among these three types in normal and turbulent times. We stress that the root of liquidity risk lies in information asymmetries and the existence of incomplete markets. The role of central bank liquidity can be important in managing a liquidity crisis, yet it is not a panacea. It can act as an immediate but temporary buffer to liquidity shocks, thereby allowing time for supervision and regulation to confront the causes of liquidity risk. JEL Classification: G10, G20

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  • Nikolaou, Kleopatra, 2009. "Liquidity (risk) concepts: definitions and interactions," Working Paper Series 1008, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20091008
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    Cited by:

    1. Rodica Hincu & Florin-Marian Buhociu & Marcelina Rosca, 2016. "The Contribution of Banks towards the Formation of Capital Market Liquidity: the Case of Moldova," Risk in Contemporary Economy, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, pages 282-290.
    2. Hertrich, Markus, 2015. "Does Credit Risk Impact Liquidity Risk? Evidence from Credit Default Swap Markets," MPRA Paper 67837, University Library of Munich, Germany.
    3. Daniel C Hardy & Philipp Hochreiter, 2014. "A Simple Macroprudential Liquidity Buffer," IMF Working Papers 14/235, International Monetary Fund.
    4. repec:eee:finsta:v:33:y:2017:i:c:p:311-330 is not listed on IDEAS

    More about this item

    Keywords

    central bank; liquidity; LLR; risk;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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