The Price of Liquidity: The Effects of Market Conditions and Bank Characteristics

54 Pages Posted: 2 Sep 2011

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

Date Written: August 23, 2011

Abstract

We study the prices that individual banks pay for liquidity (captured by borrowing rates in repos with the central bank and benchmarked by the overnight index swap) as a function of market conditions and bank characteristics. These prices depend in particular on the distribution of liquidity across banks, which is calculated over time using individual banklevel data on reserve requirements and actual holdings. Banks pay more for liquidity when positions are more imbalanced across banks, consistent with the existence of short squeezing. We also show that small banks pay more for liquidity and are more vulnerable to squeezes. Healthier banks pay less but, contrary to what one might expect, banks in formal liquidity networks do not. State guarantees reduce the price of liquidity but do not protect against squeezes.

Keywords: Banks, liquidity, money markets, repos, imbalance

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

Suggested Citation

Fecht, Falko and Nyborg, Kjell G. and Rocholl, Joerg, The Price of Liquidity: The Effects of Market Conditions and Bank Characteristics (August 23, 2011). ECB Working Paper No. 1376. Available at SSRN: https://ssrn.com/abstract=1915026

Falko Fecht

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 (Contact Author)

ESMT European School of Management and Technology ( email )

Schlossplatz 1
Berlin
Germany

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

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