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Liquidity Coinsurance and Bank Capital (Loranth G., Castiglionesi F., Pelizzon L., Feriozzi F.)

Interbank Markets Liquidity Stability&Soundness

Abstract This paper analyzes both theoretically and empirically whether banks use their capital structure to deal with the liquidity uncertainty that cannot be diversified in the interbank market. In principle, the remuneration of capital is flexible and can be adjusted to absorb undiversifiable liquidity shocks. From this perspective, bank capital can have a risk-sharing role as it can be used to transfer bank liquidity risk to well diversified bank investors. To a certain extent, bank capital and the interbank market can act as substitutes, and we argue that undiversifiable liquidity uncertainty can be an important determinant of bank capital. We show that banks tend to postpone the remuneration of capital when they are hit by liquidity shocks that cannot be diversified in the interbank market. This mechanism generates a negative relationship between a bank's activity in the interbank market and its short-term variation in bank capital. We test this prediction in a sample of large US banks and find support for the risk-sharing role of bank capital. Similar results also hold in a sample of European and Japanese banks taken from Bankscope.
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Libref/ Loranth G., Castiglionesi F., Pelizzon L., Feriozzi F. (2011) "Liquidity Coinsurance and Bank Capital", pp. 1 - 45
© Программирование — Александр Красильников, 2008
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