IDEAS home Printed from https://ideas.repec.org/a/vrs/poicbe/v17y2023i1p1779-1790n7.html
   My bibliography  Save this article

Banks as Liquidity Providers in the Interbank Market

Author

Listed:
  • Mihai Irina

    (Bucharest University of Economics Studies, National Bank of Romania, Bucharest, Romania)

Abstract

The paper analyzes structural differences in banks' ability and willingness to supply liquidity in the interbank market given the existing prudential regulation using a partial equilibrium model. The results show differences in the Liquidity Coverage Ratio (LCR) effectiveness for two types of banks' business models. First, for the more traditional one (with structural liquidity surplus), the LCR measure enables banks to lend more in the interbank market (by letting them subtract possible cash inflows from the expected outflows under a liquidity stress scenario) but at the cost of allowing them to maintain lower default limits (thresholds on the maximum liquidity shock the banks can withstand without entering default). Second, banks with structural liquidity deficits that need other funding sources than retail deposits, like subsidiaries that receive finance from their parent banks, face tighter requirements on high-quality liquid assets, keep higher default limits and lend less in the interbank market. For this business model, often seen in emerging markets, including Romania, the LCR measure fosters banks' resilience to liquidity shocks. However, this LCR functionality might encourage them to overlook contagion risk from their parent and parent banks' economies, especially under favorable financial conditions. Prudential authorities should complement the LCR measure with other instruments (like liquidity stress test) that better assess banks' liquidity risk due to maturity mismatch. Banks' liquidity risk management can partially mitigate the differences in LCR effectiveness through precautionary holdings of additional liquidity buffers. Banks with higher risk aversion prefer maintaining a higher no-penalty limit (the maximum liquidity shock the bank can accommodate without a penalty fee) and an increased default threshold and are less willing to lend in the interbank market.

Suggested Citation

  • Mihai Irina, 2023. "Banks as Liquidity Providers in the Interbank Market," Proceedings of the International Conference on Business Excellence, Sciendo, vol. 17(1), pages 1779-1790, July.
  • Handle: RePEc:vrs:poicbe:v:17:y:2023:i:1:p:1779-1790:n:7
    DOI: 10.2478/picbe-2023-0158
    as

    Download full text from publisher

    File URL: https://doi.org/10.2478/picbe-2023-0158
    Download Restriction: no

    File URL: https://libkey.io/10.2478/picbe-2023-0158?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Viral V. Acharya & Heitor Almeida & Filippo Ippolito & Ander Perezā€Orive, 2021. "Credit Lines and the Liquidity Insurance Channel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(5), pages 901-938, August.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tut, Daniel, 2021. "Cash Holdings and Firm-Level Exposure to Epidemic Diseases," MPRA Paper 109704, University Library of Munich, Germany.
    2. Rauf, Asad, 2023. "Bank stability and the price of loan commitments," Journal of Financial Intermediation, Elsevier, vol. 54(C).
    3. Lee, Jiyoon, 2022. "Do firms use credit lines to support investment opportunities?: Evidence from success in R&D," Journal of Empirical Finance, Elsevier, vol. 69(C), pages 1-14.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:vrs:poicbe:v:17:y:2023:i:1:p:1779-1790:n:7. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.sciendo.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.