The Consequences of Liquidity Imbalance: When Net Lenders Leave Interbank Markets
36 Pages Posted: 11 Aug 2016 Last revised: 10 Sep 2021
Date Written: August 10, 2016
We examine the effect of liquidity imbalances on liquidity risk using 224 bank exits from interbank markets between 1994 and 2014 in 54 emerging and developed countries. We find that bank exits from interbank markets decrease bank liquidity, especially when net placers exit an interbank market. Moreover, we also show that banks try to improve their position by selling the most liquid assets, which due to the limited capital on the market leads to a liquidity crunch. Finally, we find that a liquidity imbalance adversely affects the bank credit supply. Our findings suggest that the consequences are more severe for emerging countries than for developed countries and in pre-crisis periods.
Keywords: foreign banks, liquidity, bank exits, imbalance, financial crises
JEL Classification: G01, G12, G21, G28, D47
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