DP9162 Liquidity Coinsurance and Bank Capital
|Author(s):||Fabio Castiglionesi, Fabio Feriozzi, Gyöngyi Lóránth, Loriana Pelizzon|
|Publication Date:||October 2012|
|Keyword(s):||Bank Capital, Interbank Markets, Liquidity Coinsurance.|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=9162|
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.