Liquidity risk and policy options |
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| Institution: | 1. Department of Economics, University of Peloponnese, Greece;2. Department of Accounting and Finance, Athens University of Economics and Business, Greece;3. EDHEC Business School and EDHEC Risk Institute, France;1. Southwestern University of Finance and Economics, China;2. Stockholm School of Economics, Sweden;1. BBVA, Spain;2. University of Castilla La-Mancha, Department of Economic Analysis and Finance, 45071 Toledo, Spain;1. School of Business, University of Alberta, Canada;2. Department of Economics, Hitotsubashi University, Japan;1. University of York, Freboys Lane, YO10 5GD York, United Kingdom;2. Strathclyde University, 100 Cathedral Street, G4 0LN Glasgow, United Kingdom;3. ESCP Europe Business School, 527 Finchley Road, NW3 7BG London, United Kingdom;4. CNRS, University Paris 1 Pantheon-Sorbonne, France;5. Riskdata, France;1. University of Western Sydney, School of Business, Australia;2. University of Tasmania, Tasmanian School of Business and Economics, Australia |
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| Abstract: | On the basis of a liquidity management model, liquidity risks, defined as the probability of payment failures in a real-time gross settlement (RTGS) payment system, may either stem from liquidity management inefficiencies or insufficient cash balances. I will show that penalties charged on the amount of payment failures minimise liquidity risks without interfering with the bank’s technology preferences. I will instead show that liquidity requirements, although as effective as penalties to contain the risk of liquidity shortage, may distort the bank’s technology preferences and cannot stem liquidity management inefficiencies. I will also show that liquidity risks within RTGS payment systems are potentially smaller because they depend more on the liquidity management efficiency than on the randomness of cash inflows and outflows. |
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| Keywords: | Liquidity risk Penalty rate Liquidity requirement Liquidity management Payment system Financial regulation Policy |
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