The Transmission of Non-Banking Liquidity Shocks to the Banking Sector

Miguel Sarmiento Paipilla

The Transmission of Non-Banking Liquidity Shocks to the Banking Sector

Miguel Sarmiento Paipilla

Center Ph. D. Students

Research output: Working paper › Discussion paper › Other research output

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Abstract

The increasingly interdependence between non-banking financial institution (NBFIs) and the
banking sector conditions the provision of liquidity in the financial markets. This paper
evaluates how the market stress associated to the bankruptcy of one of the most interconnected
NBFIs in an emerging market economy affected the availability of unsecured interbank funding.
We show that the market stress conducted to a reallocation of deposits from money market
mutual funds (MMMF) within the banking sector that affected the liquidity provision in the
unsecured interbank market. Banks with ex-ante high concentration of deposits from the
MMMF sector significantly increased loan spreads and reduced the supply of unsecured funds
in the interbank market. Lending relationships and central bank liquidity contributed to
partially alleviate the liquidity shock. Overall, we identify that the concentration of uninsured
deposits from MMMFs increases the transmission of non-banking liquidity shocks to the
banking sector.

Original language	English
Place of Publication	Tilburg
Publisher	CentER, Center for Economic Research
Number of pages	48
Volume	2024-011
Publication status	Published - 22 Apr 2024

Publication series

Name	CentER Discussion Paper
Volume	2024-011

Keywords

Interbank Markets
Lending Relationships
MMMFs
NBFIs
Deposits Channel
Banks
Financial Stability

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2024-011Submitted manuscript, 602 KB

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abstract = "The increasingly interdependence between non-banking financial institution (NBFIs) and thebanking sector conditions the provision of liquidity in the financial markets. This paperevaluates how the market stress associated to the bankruptcy of one of the most interconnectedNBFIs in an emerging market economy affected the availability of unsecured interbank funding.We show that the market stress conducted to a reallocation of deposits from money marketmutual funds (MMMF) within the banking sector that affected the liquidity provision in theunsecured interbank market. Banks with ex-ante high concentration of deposits from theMMMF sector significantly increased loan spreads and reduced the supply of unsecured fundsin the interbank market. Lending relationships and central bank liquidity contributed topartially alleviate the liquidity shock. Overall, we identify that the concentration of uninsureddeposits from MMMFs increases the transmission of non-banking liquidity shocks to thebanking sector.",

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N2 - The increasingly interdependence between non-banking financial institution (NBFIs) and thebanking sector conditions the provision of liquidity in the financial markets. This paperevaluates how the market stress associated to the bankruptcy of one of the most interconnectedNBFIs in an emerging market economy affected the availability of unsecured interbank funding.We show that the market stress conducted to a reallocation of deposits from money marketmutual funds (MMMF) within the banking sector that affected the liquidity provision in theunsecured interbank market. Banks with ex-ante high concentration of deposits from theMMMF sector significantly increased loan spreads and reduced the supply of unsecured fundsin the interbank market. Lending relationships and central bank liquidity contributed topartially alleviate the liquidity shock. Overall, we identify that the concentration of uninsureddeposits from MMMFs increases the transmission of non-banking liquidity shocks to thebanking sector.

AB - The increasingly interdependence between non-banking financial institution (NBFIs) and thebanking sector conditions the provision of liquidity in the financial markets. This paperevaluates how the market stress associated to the bankruptcy of one of the most interconnectedNBFIs in an emerging market economy affected the availability of unsecured interbank funding.We show that the market stress conducted to a reallocation of deposits from money marketmutual funds (MMMF) within the banking sector that affected the liquidity provision in theunsecured interbank market. Banks with ex-ante high concentration of deposits from theMMMF sector significantly increased loan spreads and reduced the supply of unsecured fundsin the interbank market. Lending relationships and central bank liquidity contributed topartially alleviate the liquidity shock. Overall, we identify that the concentration of uninsureddeposits from MMMFs increases the transmission of non-banking liquidity shocks to thebanking sector.

KW - Interbank Markets

KW - Lending Relationships

KW - MMMFs

KW - NBFIs

KW - Deposits Channel

KW - Banks

KW - Financial Stability

M3 - Discussion paper

VL - 2024-011

T3 - CentER Discussion Paper

BT - The Transmission of Non-Banking Liquidity Shocks to the Banking Sector

PB - CentER, Center for Economic Research

CY - Tilburg

ER -

The Transmission of Non-Banking Liquidity Shocks to the Banking Sector

Abstract

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