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Discussion Paper Details

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Title: Liquidity Coinsurance and Bank Capital

Author(s): Fabio Castiglionesi, Fabio Feriozzi, Gyöngyi Lóránth and Loriana Pelizzon

Publication Date: October 2012

Keyword(s): Bank Capital, Interbank Markets and Liquidity Coinsurance.

Programme Area(s): Financial Economics

Abstract: Banks can deal with their liquidity risk by holding liquid assets (self-insurance), by participating in the interbank market (coinsurance), or by using flexible financing instruments, such as bank capital (risk-sharing). We study how the access to an interbank market affects banks' incentive to hold capital. A general insight is that from a risk-sharing perspective it is optimal to postpone payouts to capital investors when a bank is hit by a liquidity shock that it cannot coinsure on the interbank market. This mechanism produces a negative relationship between interbank activity and bank capital. We provide empirical support for this prediction in a large sample of U.S. commercial banks, as well as in a sample of European and Japanese commercial banks.

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Bibliographic Reference

Castiglionesi, F, Feriozzi, F, Lóránth, G and Pelizzon, L. 2012. 'Liquidity Coinsurance and Bank Capital'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9162