Bank Information Sharing and Liquidity Risk

60 Pages Posted: 29 Mar 2019 Last revised: 1 Feb 2021

See all articles by Fabio Castiglionesi

Fabio Castiglionesi

Tilburg University - Department of Finance

Zhao Li

University of International Business and Economics (UIBE) - School of Banking and Finance

Kebin Ma

University of Warwick - Finance Group

Date Written: March 27, 2019

Abstract

We propose a novel rationale for the existence of bank information sharing schemes. Banks may voluntarily disclose borrowers' credit history to maintain asset market liquidity. By sharing such information, banks mitigate adverse selection when selling their loans in secondary markets. This reduces the cost of asset liquidation in case of liquidity shocks. Information sharing arises endogenously when the liquidity benefit dominates the cost of losing market power in the primary loan market competition. We show banks having incentives to truthfully disclose borrowers' credit history, even if such information is non-verifiable. We also provide a rationale for promoting public credit registries.

Keywords: Information Sharing, Funding Liquidity Risk, Market Liquidity, Adverse Selection

JEL Classification: G21

Suggested Citation

Castiglionesi, Fabio and Li, Zhao and Ma, Kebin, Bank Information Sharing and Liquidity Risk (March 27, 2019). WBS Finance Group Research Paper No. 264, Available at SSRN: https://ssrn.com/abstract=3362223 or http://dx.doi.org/10.2139/ssrn.3362223

Fabio Castiglionesi

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Zhao Li

University of International Business and Economics (UIBE) - School of Banking and Finance ( email )

No.10, Huixindong Street
Chaoyang District
Beijing, 100029
China

Kebin Ma (Contact Author)

University of Warwick - Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

HOME PAGE: http://www.kebinma.com

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