Liquidity Shocks, Market Discipline and Liquidity Risk: Evidence from the Interbank Market

44 Pages Posted: 5 May 2018 Last revised: 13 May 2018

See all articles by Miguel Sarmiento

Miguel Sarmiento

Tilburg University, CentER, European Banking Center (EBC); Central Bank of Colombia

Date Written: April 17, 2018

Abstract

This paper examines the impact of exogenous liquidity shocks on banks borrowing funds in the interbank market. We evaluate the effects of idiosyncratic liquidity shocks — arising from deposits outflow at the bank level — and of the aggregate liquidity shock related to the U.S. tapering observed in May 2013. We find that both liquidity shocks are associated with higher interbank loan prices, albeit the magnitude of the overprice and the impact on the access to interbank liquidity differ depending on borrower-specific characteristics. More capitalized and liquid banks can obtain lower prices and gain more access to the interbank market, even during liquidity shocks. Small banks are found to suffer more in terms of finding liquidity as their own credit risk and liquidity risk increase, and are more affected by liquidity shocks when compared to large banks. Lending relationships and central bank liquidity alleviate funding costs and smooth the impact of liquidity shocks. Results have implications for both financial stability and monetary policy transmission.

Keywords: interbank markets, market discipline, liquidity risk, exogenous liquidity shocks, monetary policy, financial stability.

JEL Classification: E43, E58, L14, G12, G21.

Suggested Citation

Sarmiento, Miguel, Liquidity Shocks, Market Discipline and Liquidity Risk: Evidence from the Interbank Market (April 17, 2018). Available at SSRN: https://ssrn.com/abstract=3164584 or http://dx.doi.org/10.2139/ssrn.3164584

Miguel Sarmiento (Contact Author)

Tilburg University, CentER, European Banking Center (EBC) ( email )

Tilburg
Netherlands

HOME PAGE: http://https://scholar.google.com/citations?user=n2FzTYAAAAAJ&hl=es&oi=ao

Central Bank of Colombia ( email )

Carrera 7 #14-78
3551 de Bogotá
Colombia

HOME PAGE: http://www.banrep.gov.co/

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