Working paper : The price of liquidity: the effects of market conditions and bank characteristics, by Falko Fecht, Kjell G. Nyborg and Jörg Rocholl

02/09/2011 | BCE

We study the prices that individual banks pay for liquidity (captured by borrowing rates in
repos with the central bank and benchmarked by the overnight index swap) as a function
of market conditions and bank characteristics. These prices depend in particular on the
distribution of liquidity across banks, which is calculated over time using individual banklevel
data on reserve requirements and actual holdings. Banks pay more for liquidity
when positions are more imbalanced across banks, consistent with the existence of short
squeezing. We also show that small banks pay more for liquidity and are more vulnerable
to squeezes. Healthier banks pay less but, contrary to what one might expect, banks in
formal liquidity networks do not. State guarantees reduce the price of liquidity but do not
protect against squeezes.
JEL classification: G12, G21, E43, E58, D44
Keywords: Banks, Liquidity, Money markets, Repos, Imbalance