Liquidity Provision and Co-Insurance in Bank Syndicates

59 Pages Posted: 29 Sep 2021

See all articles by Kevin F. Kiernan

Kevin F. Kiernan

Independent

Vladimir Yankov

Board of Governors of the Federal Reserve System

Filip Zikes

Board of Governors of the Federal Reserve System

Date Written: September 1, 2021

Abstract

We study the capacity of the banking system to provide liquidity to the corporate sector in times of stress and how changes in this capacity affect corporate liquidity management. We show that the contractual arrangements among banks in loan syndicates co-insure liquidity risks of credit line drawdowns and generate a network of interbank exposures. We develop a simple model and simulate the liquidity and insurance capacity of the banking network. We find that the liquidity capacity of large banks has significantly increased following the introduction of liquidity regulation, and that the liquidity co-insurance function in loan syndicates is economically important. We also find that borrowers with higher reliance on credit lines in their liquidity management have become more likely to obtain credit lines from syndicates with higher liquidity. The assortative matching on liquidity characteristics has strengthened the role of banks as liquidity providers to the corporate sector.

Keywords: Liquidity insurance, Liquidity regulation, Interbank networks, Syndicated credit lines

JEL Classification: G21, G18, L14

Suggested Citation

Kiernan, Kevin F. and Yankov, Vladimir and Zikes, Filip, Liquidity Provision and Co-Insurance in Bank Syndicates (September 1, 2021). FEDS Working Paper No. 2021-60, Available at SSRN: https://ssrn.com/abstract=3931997 or http://dx.doi.org/10.17016/FEDS.2021.060

Vladimir Yankov

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Filip Zikes

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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