The Price of Liquidity: Bank Characteristics and Market Conditions

54 Pages Posted: 19 May 2010

See all articles by Falko Fecht

Falko Fecht

Frankfurt School of Finance & Management

Kjell G. Nyborg

University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Jörg Rocholl

ESMT European School of Management and Technology

Multiple version iconThere are 4 versions of this paper

Date Written: April 2010

Abstract

We identify frictions in the market for liquidity as well as bank-specific and market-wide factors that affect the prices that banks pay for liquidity, captured here by borrowing rates in repos with the central bank and benchmarked by the overnight index swap. We have price data at the individual bank level and, unique to this paper, data on individual banks’ reserve requirements and actual reserve holdings, thus allowing us to gauge the extent to which a bank is short or long liquidity. We find that the price a bank pays for liquidity depends on the liquidity positions of other banks, as well as its own. There is evidence that liquidity squeezes occasionally occur and short banks pay more the larger is the potential for a squeeze. The price paid for liquidity is decreasing in bank size and small banks are more adversely affected by an increased potential for a squeeze. Healthier banks pay less, but contrary to what one might expect, banks in formal liquidity networks do not.

Keywords: banks, financial health, liquidity, money markets, repos, short squeezing

JEL Classification: D44, E43, E58, G12, G21

Suggested Citation

Fecht, Falko and Nyborg, Kjell G. and Rocholl, Joerg, The Price of Liquidity: Bank Characteristics and Market Conditions (April 2010). CEPR Discussion Paper No. DP7794. Available at SSRN: https://ssrn.com/abstract=1611490

Falko Fecht (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Kjell G. Nyborg

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland
+41 (0)44 634 2980 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Joerg Rocholl

ESMT European School of Management and Technology ( email )

Schlossplatz 1
Berlin
Germany

HOME PAGE: http://www.esmt.org/en/159244

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