Liquidity Coinsurance and Bank Capital

SAFE Working Paper No. 45

48 Pages Posted: 13 Mar 2014

See all articles by Fabio Castiglionesi

Fabio Castiglionesi

Tilburg University - Department of Finance

Fabio Feriozzi

IE Business School, IE University

Gyongyi Loranth

University of Vienna; Centre for Economic Policy Research (CEPR)

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration; Goethe University Frankfurt - Research Center SAFE; Ca Foscari University of Venice

Date Written: March 1, 2014

Abstract

Banks can deal with their liquidity risk by holding liquid assets (self-insurance), by participating in interbank markets (coinsurance), or by using flexible financing instruments, such as bank capital (risk-sharing). We use a simple model to show that undiversi fiable liquidity risk, i.e. the liquidity risk that banks are unable to coinsure on interbank markets, represents an important risk factor affecting their capital structures. Banks facing higher undiversi fiable liquidity risk hold more capital. We posit that empirically banks that are more exposed to undiversifi able liquidity risk are less active on interbank markets. Therefore, we test for the existence of a negative relationship between bank capital and interbank market activity and fi nd support in a large sample of U.S. commercial banks.

Keywords: Bank Capital, Interbank Markets, Liquidity Coinsurance

JEL Classification: G21

Suggested Citation

Castiglionesi, Fabio and Feriozzi, Fabio and Loranth, Gyongyi and Pelizzon, Loriana, Liquidity Coinsurance and Bank Capital (March 1, 2014). SAFE Working Paper No. 45. Available at SSRN: https://ssrn.com/abstract=2407517 or http://dx.doi.org/10.2139/ssrn.2407517

Fabio Castiglionesi

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Fabio Feriozzi

IE Business School, IE University ( email )

Finance Department
Maria de Molina, 12
Madrid, 28006
Spain

Gyongyi Loranth

University of Vienna ( email )

Vienna

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Loriana Pelizzon (Contact Author)

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, D-60323
Germany

Goethe University Frankfurt - Research Center SAFE ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

HOME PAGE: http://www.safe-frankfurt.de

Ca Foscari University of Venice ( email )

Dorsoduro 3246
Venice, Veneto 30123
Italy

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