Liquidity Risk in Banking: Is there Herding?

D. Bonfim, M. Kim

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Abstract

Abstract: Banks individually optimize their liquidity risk management, often neglecting the externalities generated by their choices on the overall risk of the financial system. This is the main argument to support the regulation of liquidity risk. However, there may be incentives, related for instance to the role of the lender of last resort, for banks to optimize their choices not strictly at the individual level, but engaging instead in collective risk taking strategies, which may intensify systemic risk. In this paper we look for evidence of such herding behaviors, with an emphasis on the period preceding the global financial crisis. Herding is significant only among the largest banks, after adequately controlling for relevant endogeneity problems associated with the estimation of peer effects. This result suggests that the regulation of systemically important financial institutions may play an important role in mitigating this specific component of liquidity risk.
Original languageEnglish
Place of PublicationTilburg
PublisherEBC
Number of pages43
Volume2012-024
Publication statusPublished - 2012

Publication series

NameEBC Discussion Paper
Volume2012-024

Keywords

  • banks
  • liquidity risk
  • regulation
  • herding
  • peer effects
  • Basel III
  • macroprudential policy
  • systemic risk

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  • Cite this

    Bonfim, D., & Kim, M. (2012). Liquidity Risk in Banking: Is there Herding? (EBC Discussion Paper; Vol. 2012-024). EBC.