Inside Liquidity in Competitive Markets

32 Pages Posted: 13 Jul 2013

See all articles by Michiel Bijlsma

Michiel Bijlsma

University of Amsterdam - SEO Economic Research; Tilburg Law and Economics Center (TILEC)

Andrei Dubovik

CPB Netherlands Bureau of Economic Policy Analysis

Gijsbert Zwart

University of Groningen

Date Written: June 25, 2013

Abstract

We study incentives of banks to reserve liquidity given that they can rely on the interbank market to mitigate crisis-related liquidity shocks. Banks can partially pledge their assets to each other, but not to the rest of the economy. Therefore liquidity provision is endogenous. We show that if the probability of a crisis is large or if assets are slightly pledgeable, then all banks reserve liquidity. However, if the probability of a crisis is small or if assets are highly pledgeable, then banks segregate ex ante: some reserve no liquidity, others reserve to the maximum and become liquidity providers. Minimum liquidity requirements improve banks' pro ts only in the symmetric equilibrium. A marginal central bank intervention aimed at lowering the interest rate causes a marginal crowding-out of private liquidity with public liquidity in the symmetric equilibrium, and a full crowding-out in the asymmetric equilibrium.

Keywords: inside liquidity, partial pledgeability, interbank markets

JEL Classification: E43, G20, G33

Suggested Citation

Bijlsma, Michiel and Dubovik, Andrei and Zwart, Gijsbert, Inside Liquidity in Competitive Markets (June 25, 2013). TILEC Discussion Paper No. 2013-019, Available at SSRN: https://ssrn.com/abstract=2293150 or http://dx.doi.org/10.2139/ssrn.2293150

Michiel Bijlsma (Contact Author)

University of Amsterdam - SEO Economic Research ( email )

Roetersstraat 29
Amsterdam, 1018 WB
Netherlands

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

Andrei Dubovik

CPB Netherlands Bureau of Economic Policy Analysis ( email )

P.O. Box 80510
2508 GM The Hague, 2585 JR
Netherlands

HOME PAGE: http://www.yellowsite.ru/en

Gijsbert Zwart

University of Groningen ( email )

P.O. Box 800
9700 AH Groningen, Groningen 9700 AV
Netherlands

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