Bank market power,asset liquidity and funding liquidity: International evidence |
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| Institution: | 1. School of Economics, Finance and Marketing, RMIT University, 445 Swanston Street, Melbourne, Victoria 3001, Australia;2. Department of Banking and Finance, Monash University, Caulfield Campus, Caulfield East, Victoria 3145, Australia;1. Bank of Korea, 39, Namdaemun-Ro, Jung-Gu, Seoul 100-794, Republic of Korea;2. Korea University Business School, Anam-dong, Seongbuk-gu, Seoul 136-701, Republic of Korea;1. KPMG WPG AG, The Squaire, Am Flughafen, 60549 Frankfurt am Main, Germany;2. J.P. Morgan Bank Luxembourg SA, Rue de Trèves, 2633 Senningerberg, Luxembourg;3. Department IV – Mathematics, University of Trier, Universitätsring 19, 54296 Trier, Germany |
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| Abstract: | Our investigation of the association between bank market power and liquidity in 101 countries reveals that a bank's initial gains of market power lead to increases in bank liquidity, but does so at a diminishing rate. Beyond an empirically determined threshold, further increases in market power are inversely associated with bank liquidity. From a cross-sectional viewpoint, banks that lack market power hold more liquid assets and are net lenders in the interbank market. In contrast, dominant banks hold less liquid assets and are net interbank borrowers. For a given level of market power, ceteris paribus, developed nation banks hold less asset liquidity and obtain more interbank funding liquidity than their developing country peers. These results remain equally relevant during the 2007–2009 global financial crisis (GFC). |
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