Liquidity Matters: Evidence from the Russian Interbank Market

27 Pages Posted: 20 Nov 2008

See all articles by Alexei Karas

Alexei Karas

Utrecht University, University College Roosevelt; Utrecht University School of Economics; Centre for Russian International Socio-Political and Economic Studies (CERISE)

Koen J. L. Schoors

Ghent University - Centre for Russian International Socio-Political and Economic Studies (CERISE); Ghent University - Department of General Economics

Gleb Lanine

Ghent University - Department of Financial Economics; Ghent University - Centre for Russian International Socio-Political and Economic Studies (CERISE)

Date Written: November 12, 2008

Abstract

We suggest an additional transmission channel of contagion on the interbank market - the liquidity channel. Examining the Russian banking sector, we and that the liquidity channel contributes significantly to understanding and predicting interbank market crises. Interbank market stability Granger causes the interbank market structure, while the opposite causality is rejected. This bolsters the view that the interbank market structure is endogenous. The results corroborate the thesis that prudential regulation at the individual bank level is insufficient to prevent systemic crises. We demonstrate that liquidity injections of a classical lender of last resort can effectively mitigate coordination failures on the interbank market both in theory and practice. Apparently, liquidity does matter.

Keywords: interbank market stability, contagion, liquidity channel, lender of last resort, Russia

JEL Classification: C8, G21

Suggested Citation

Karas, Alexei and Schoors, Koen J. L. and Lanine, Gleb, Liquidity Matters: Evidence from the Russian Interbank Market (November 12, 2008). BOFIT Discussion Paper No. 19/2008, Available at SSRN: https://ssrn.com/abstract=1304594 or http://dx.doi.org/10.2139/ssrn.1304594

Alexei Karas (Contact Author)

Utrecht University, University College Roosevelt ( email )

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Koen J. L. Schoors

Ghent University - Centre for Russian International Socio-Political and Economic Studies (CERISE) ( email )

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+32 9 264 34 78 (Phone)
+32 9 265 35 99 (Fax)

Ghent University - Department of General Economics ( email )

Tweekerkenstraat 2
Ghent, 9000
Belgium
+32 9 264 34 78 (Phone)
+32 9 264 35 99 (Fax)

Gleb Lanine

Ghent University - Department of Financial Economics ( email )

Ghent, 9000
Belgium

Ghent University - Centre for Russian International Socio-Political and Economic Studies (CERISE)

Gent, 9000
Belgium

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