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Tracing the Liquidity Effects on Bank Stability in Barbados

  • Guy, Kester
  • Lowe, Shane
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    This paper provides a micro-economic approach to evaluating bank stability in the face of adverse liquidity conditions. Specifically, it examines the potential for systemic risk as a result of liquidity shocks on each bank. According to Nier et al., (2008) systemic risk results when the failure of multiple banks imposes significant costs on the entire economy. This assessment is done by tracing the liquidity effect across institutions based on the degree of exposure among commercial banks. In this study, a bank with an after-shock capital adequacy ratio (CAR) less than 8 percent is assumed to require additional capital. In addition, systemic risk rises when the CAR of the entire banking sector converges to the 8 percent threshold. Overall, the results suggest that banks in Barbados are well capitalised and are able to withstand significant liquidity shocks. In addition, the study found that banks can be ranked in terms of systemic importance. Consequently, the second-round effects that result from systemically important banks tend to have large impacts with significant implications for bank stability.

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    File URL: http://mpra.ub.uni-muenchen.de/52205/1/MPRA_paper_52205.pdf
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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 52205.

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    Date of creation: Jun 2012
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    Handle: RePEc:pra:mprapa:52205
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    1. Nier, Erlend & Yang, Jing & Yorulmazer, Tanju & Alentorn, Amadeo, 2007. "Network models and financial stability," Journal of Economic Dynamics and Control, Elsevier, vol. 31(6), pages 2033-2060, June.
    2. Atif Mian & Asim Ijaz Khwaja, 2006. "Tracing the Impact of Bank Liquidity Shocks: Evidence from an Emerging Market," NBER Working Papers 12612, National Bureau of Economic Research, Inc.
    3. Tarron Khemraj, 2007. "What does excess bank liquidity say about the loan market in Less Developed Countries?," Working Papers 60, United Nations, Department of Economics and Social Affairs.
    4. Guillermo Alger & Ingela Alger, 1999. "Liquid Assets in Banks: Theory and Practice," Boston College Working Papers in Economics 446, Boston College Department of Economics.
    5. Agenor, Pierre-Richard & Aizenman, Joshua & Hoffmaister, Alexander, 2000. "The credit crunch in East Asia : what can bank excess liquid assets tell us ?," Policy Research Working Paper Series 2483, The World Bank.
    6. Hans Degryse & Muhammad Ather Elahi & Maria Fabiana Penas, 2010. "Cross-Border Exposures and Financial Contagion," International Review of Finance, International Review of Finance Ltd., vol. 10(Financial), pages 209-240.
    7. Marco A. Espinosa-Vega & Juan Solé, 2011. "Cross-border financial surveillance: a network perspective," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 3(3), pages 182-205, August.
    8. Jan Willem van den End, 2008. "Liquidity Stress-Tester: A macro model for stress-testing banks' liquidity risk," DNB Working Papers 175, Netherlands Central Bank, Research Department.
    9. Jokipii , Terhi & Lucey, Brian, 2006. "Contagion and interdependence: measuring CEE banking sector co-movements," Research Discussion Papers 15/2006, Bank of Finland.
    10. De Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic risk: A survey," Working Paper Series 0035, European Central Bank.
    11. Agénor, Pierre-Richard & Aynaoui, Karim El, 2010. "Excess liquidity, bank pricing rules, and monetary policy," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 923-933, May.
    12. Khemraj, Tarron, 2008. "Excess Liquidity and the Foreign Currency Constraint: The Case of Monetary Management in Guyana," MPRA Paper 53127, University Library of Munich, Germany.
    13. Laura Valderrama & Wendell A. Samuel, 2006. "The Monetary Policy Regime and Banking Spreads in Barbados," IMF Working Papers 06/211, International Monetary Fund.
    14. Tarron Khemraj, 2008. "Excess liquidity, oligopolistic loan markets and monetary policy in LDCs," Working Papers 64, United Nations, Department of Economics and Social Affairs.
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