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The price of liquidity: the effects of market conditions and bank characteristics

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  • Nyborg, Kjell G.
  • Fecht, Falko
  • Rocholl, Jörg

Abstract

We study the prices that individual banks pay for liquidity (captured by borrowing rates in repos with the central bank and benchmarked by the overnight index swap) as a function of market conditions and bank characteristics. These prices depend in particular on the distribution of liquidity across banks, which is calculated over time using individual bank-level data on reserve requirements and actual holdings. Banks pay more for liquidity when positions are more imbalanced across banks, consistent with the existence of short squeezing. We also show that small banks pay more for liquidity and are more vulnerable to squeezes. Healthier banks pay less but, contrary to what one might expect, banks in formal liquidity networks do not. State guarantees reduce the price of liquidity but do not protect against squeezes. JEL Classification: G12, G21, E43, E58, D44

Suggested Citation

  • Nyborg, Kjell G. & Fecht, Falko & Rocholl, Jörg, 2011. "The price of liquidity: the effects of market conditions and bank characteristics," Working Paper Series 1376, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20111376
    Note: 77663
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    More about this item

    Keywords

    banks; imbalance; liquidity; money markets; repos;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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