Liquidity Provision and Co-Insurance in Bank Syndicates

Abstract

We develop a simple model of the liquidity and insurance capacity of the interbank network arising from loan syndication. We find that the liquidity capacity has increased significantly following the introduction of liquidity regulation, and that the liquidity co-insurance is economically important for the corporate sector. We also find that borrowers with higher reliance on credit lines have become more likely to obtain credit lines from syndicates with higher liquidity capacities. The increase in liquidity capacities and the assortative matching on liquidity characteristics has strengthened the importance of large banks as liquidity providers to the corporate sector.

Keywords: G21, G18, L14

JEL Classification: Liquidity Insurance, Liquidity Regulation, Interbank networks, Syndicated Credit Lines