Liquidity coinsurance and bank capital

F. Castiglionesi, F. Feriozzi, G. Lóránth, L. Pelizzon

Research output: Contribution to journalArticleScientificpeer-review

7 Citations (Scopus)
186 Downloads (Pure)

Abstract

Banks can deal with their liquidity risk by holding liquid assets (self-insurance), by participating in interbank markets (coinsurance), or by using flexible financing instruments, such as bank capital (risk sharing). We use a simple model to show that undiversifiable liquidity risk, that is, the liquidity risk that banks are unable to coinsure on interbank markets, represents an important risk factor affecting their capital structures. Banks facing higher undiversifiable liquidity risk hold more capital. We posit that, empirically, banks that are more exposed to undiversifiable liquidity risk are less active on interbank markets. Therefore, we test for the existence of a negative relationship between bank capital and interbank market activity and find support in a large sample of U.S. commercial banks.
Original languageEnglish
Pages (from-to)409-443
JournalJournal of Money, Credit and Banking
Volume46
Issue number2-3
DOIs
Publication statusPublished - Mar 2014

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