The Price of Liquidity: Bank Characteristics and Market Conditions
49 Pages Posted: 3 Mar 2008
Date Written: February 29, 2008
We test for imperfections in the market for liquidity using price data at the individual bank level in the primary market in the euro zone. Unique to this paper, we also have data on individual banks' reserve positions relative to what they are required to hold with the central bank, thus allowing us to gauge the extent to which a bank is short or long liquidity. We find evidence that liquidity squeezes occur from time to time. A greater imbalance in positions across banks is associated with a rise in the relative price of liquidity. This imbalance effect is felt more keenly by a bank the shorter and smaller it is, suggesting that smaller banks are more vulnerable to liquidity squeezes. Controlling for a variety of factors, we also find that larger banks pay less for liquidity than do smaller banks, supporting the view that larger banks have better access to the interbank market. Contrary to what one might expect, banks in formal liquidity networks do not pay less.
Keywords: Liquidity, Banking, Short Squeezes, Money Markets, Repo Auctions
JEL Classification: G1, G21, E5, D44
Suggested Citation: Suggested Citation