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Liquidity Coinsurance and Bank Capital

Author

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  • Lóránth, Gyöngyi
  • Castiglionesi, Fabio
  • Feriozzi, Fabio
Abstract
Banks can deal with their liquidity risk by holding liquid assets (self-insurance), by participating in the interbank market (coinsurance), or by using flexible financing instruments, such as bank capital (risk-sharing). We study how the access to an interbank market affects banks' incentive to hold capital. A general insight is that from a risk-sharing perspective it is optimal to postpone payouts to capital investors when a bank is hit by a liquidity shock that it cannot coinsure on the interbank market. This mechanism produces a negative relationship between interbank activity and bank capital. We provide empirical support for this prediction in a large sample of U.S. commercial banks, as well as in a sample of European and Japanese commercial banks.

Suggested Citation

  • Lóránth, Gyöngyi & Castiglionesi, Fabio & Feriozzi, Fabio, 2012. "Liquidity Coinsurance and Bank Capital," CEPR Discussion Papers 9162, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:9162
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    Cited by:

    1. Fabio Castiglionesi & Fabio Feriozzi & Guido Lorenzoni, 2019. "Financial Integration and Liquidity Crises," Management Science, INFORMS, vol. 65(3), pages 955-975, March.
    2. Beladi, Hamid & Hu, May & Park, Jason & How, Janice, 2020. "Liquidity creation and funding ability during the interbank lending crunch," International Review of Financial Analysis, Elsevier, vol. 67(C).
    3. Beccalli, Elena & Frantz, Pascal, 2016. "Why are some banks recapitalized and others taken over?," LSE Research Online Documents on Economics 67305, London School of Economics and Political Science, LSE Library.
    4. Diemo Dietrich & Achim Hauck, 2020. "Interbank borrowing and lending between financially constrained banks," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 70(2), pages 347-385, September.
    5. Eboli, Mario, 2019. "A flow network analysis of direct balance-sheet contagion in financial networks," Journal of Economic Dynamics and Control, Elsevier, vol. 103(C), pages 205-233.
    6. Chen Zheng & Adrian (Wai Kong) Cheung & Tom Cronje, 2022. "The Impact of TARP Capital Infusion on Bank Liquidity Creation: Does Bank Size Matter?," International Journal of Central Banking, International Journal of Central Banking, vol. 18(2), pages 283-347, June.
    7. Zheng, Chen & (Wai Kong) Cheung, Adrian & Cronje, Tom, 2019. "The moderating role of capital on the relationship between bank liquidity creation and failure risk," Journal of Banking & Finance, Elsevier, vol. 108(C).
    8. Beccalli, Elena & Frantz, Pascal, 2016. "Why are some banks recapitalized and others taken over?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 45(C), pages 79-95.
    9. Kasinger, Johannes & Pelizzon, Loriana, 2018. "Financial stability in the EU: A case for micro data transparency," SAFE Policy Letters 67, Leibniz Institute for Financial Research SAFE.
    10. Jose Fique, 2016. "A Microfounded Design of Interconnectedness-Based Macroprudential Policy," Staff Working Papers 16-6, Bank of Canada.
    11. Rauf, Asad, 2023. "Bank stability and the price of loan commitments," Journal of Financial Intermediation, Elsevier, vol. 54(C).
    12. Choi, Seungho & Gam, Yong Kyu & Park, Junho & Shin, Hojong, 2020. "Bank partnership and liquidity crisis," Journal of Banking & Finance, Elsevier, vol. 120(C).

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    More about this item

    Keywords

    Liquidity coinsurance.; Bank capital; Interbank markets;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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