Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/76033
Authors: 
Fecht, Falko
Nyborg, Kjell G.
Rocholl, Jörg
Year of Publication: 
2010
Series/Report no.: 
Working Paper, Universität Zürich, Institut für Schweizerisches Bankwesen 50
Abstract: 
We identify frictions in the market for liquidity as well as bank-specific and market-wide factors that affect the prices that banks pay for liquidity, captured here by borrowing rates in repos with the central bank and benchmarked by the overnight index swap. We have price data at the individual bank level and, unique to this paper, data on individual banks' reserve requirements and actual reserve holdings, thus allowing us to gauge the extent to which a bank is short or long liquidity. We find that the price a bank pays for liquidity depends on the liquidity positions of other banks, as well as its own. There is evidence that liquidity squeezes occasionally occur and short banks pay more the larger is the potential for a squeeze. The price paid for liquidity is decreasing in bank size and small banks are more adversely affected by an increased potential for a squeeze. Healthier banks pay less, but contrary to what one might expect, banks in formal liquidity networks do not.
Subjects: 
banks
liquidity
money markets
repos
short squeezing
financial health
JEL: 
G12
G21
E43
E58
D44
Document Type: 
Working Paper

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