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| Author: | Fecht, F. Nyborg, K.G. Rocholl, J. |
| Title: | The price of liquidity: the effects of market conditions and bank characteristics |
| Journal: | Journal of Financial Economics
2011 : NOV, VOL. 102:2, p. 344-362 |
| Index terms: | banking bank reserves liquidity swaps central banks commercial banks repos |
| Language: | eng |
| Abstract: | We inspect the prices 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 attributes. These prices particularly depend on the liquidity distribution across banks, calculated over time using individual bank-level data about reserve requirements and actual holdings. Banks pay more for liquidity when there is more imbalance in the positions across banks, in line with the existence of short squeezing. We also demonstrate that small banks pay more for liquidity and are more prone to squeezes. Healthier banks pay less but, contrary to usual expectations, banks in formal liquidity networks do not. State guarantees lower the price of liquidity but do not shield against squeezes. |
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