Bank liquidity creation,monetary policy,and financial crises

This paper examines the interplay among bank liquidity creation (which incorporates all bank on- and off-balance sheet activities), monetary policy, and financial crises. We find that: (1) high liquidity creation (relative to trend) – particularly off-balance sheet liquidity creation – helps predict crises, controlling for other factors; (2) monetary policy has statistically significant, but economically minor effects on liquidity creation by small banks during normal times, and these effects are even weaker during financial crises; (3) monetary policy has very little effects on medium and large bank liquidity creation during both normal times and crises. These findings suggest that authorities may wish to monitor bank liquidity creation closely in order to predict and perhaps lessen the likelihood of financial crises. They might also consider other tools to control bank liquidity creation, such as capital and liquidity requirements.     

The financial crisis in Norway: effects on financial markets and measures taken

This article guides through the measures implemented in Norway in order to dampen negative effects stemming from the financial crisis. We also discuss some features of the Norwegian money market and the liquidity system in Norway. From the point of view of central banks, the widening gap between money market rates and the key policy rate has been one disturbing element of the financial crises. We develop a simple model, which illustrates how developments in forward exchange premiums can provide insight as to why money market premiums differ across currencies. The model shows that the excess supply of term liquidity in dollar relative to the excess supply of term liquidity in other currencies has an impact on the domestic money market premium relative to that on USD.     

Complexity, concentration and contagion

This paper develops a network model of interbank lending in which unsecured claims, repo activity and shocks to the haircuts applied to collateral assume centre stage. We show how systemic liquidity crises of the kind associated with the interbank market collapse of 2007–2008 can arise within such a framework, with funding contagion spreading widely through the web of interlinkages. Our model illustrates how greater complexity and concentration in the financial network may amplify this fragility. The analysis suggests how a range of policy measures – including tougher liquidity regulation, macro-prudential policy, and surcharges for systemically important financial institutions – could make the financial system more resilient.     

Sovereign debt and reserves with liquidity and productivity crises

During the recent financial crisis, emerging economies have kept accumulating both sovereign reserves and debt. To account for this empirical fact, we model the optimal portfolio choice of a sovereign that is subject to liquidity and productivity shocks. We determine the equilibrium level of debt and its cost by solving a contracting game between sovereign and international lenders. Although raising debt increases the sovereign exposure to liquidity and productivity crises, the simultaneous accumulation of reserves can mitigate the negative effects of such crises. This mechanism rationalizes the complementarity between debt and reserves.     

Credit risk transfer and contagion

Some have argued that recent increases in credit risk transfer are desirable because they improve the diversification of risk. Others have suggested that they may be undesirable if they increase the risk of financial crises. Using a model with banking and insurance sectors, we show that credit risk transfer can be beneficial when banks face uniform demand for liquidity. However, when they face idiosyncratic liquidity risk and hedge this risk in an interbank market, credit risk transfer can be detrimental to welfare. It can lead to contagion between the two sectors and increase the risk of crises.     

Illiquidity or credit deterioration: A study of liquidity in the US corporate bond market during financial crises

We investigate whether liquidity is an important price factor in the US corporate bond market. In particular, we focus on whether liquidity effects are more pronounced in periods of financial crises, especially for bonds with high credit risk, using a unique data set covering more than 20,000 bonds, between October 2004 and December 2008. We employ a wide range of liquidity measures and find that liquidity effects account for approximately 14% of the explained market-wide corporate yield spread changes. We conclude that the economic impact of the liquidity measures is significantly larger in periods of crisis, and for speculative grade bonds.     

Financial crises and emerging stock markets volatility: do internal factors matter?

This paper has two central aims. The first one is to deal empirically with the effects of financial crises on emerging stock markets volatility. The second objective consists in testing if the level of stock market development affects this relationship. For this purpose, we estimate a static panel data model for a sample of nine emerging economies from January 1990 to December 2006. We consider three types of financial crises, i.e. banking, currency and twin crises. Our empirical results suggest that the onset of financial crises strongly increased stock market volatility. In addition, we find that the biggest impact is exerted by twin crises. When dealing with the second objective, our results show that the market size and the liquidity level can attenuate the effects of banking and currency crises, but not the one associated to twin crises. Nevertheless, the degree of stock market integration seems to reduce the effects of banking, currency and twin crises on stock market volatility.     

Risk allocation under liquidity constraints

Risk allocation games are cooperative games that are used to attribute the risk of a financial entity to its divisions. In this paper, we extend the literature on risk allocation games by incorporating liquidity considerations. A liquidity policy specifies state-dependent liquidity requirements that a portfolio should obey. To comply with the liquidity policy, a financial entity may have to liquidate part of its assets, which is costly.The definition of a risk allocation game under liquidity constraints is not straightforward, since the presence of a liquidity policy leads to externalities. We argue that the standard worst case approach should not be used here and present an alternative definition. We show that the resulting class of transferable utility games coincides with the class of totally balanced games. It follows from our results that also when taking liquidity considerations into account there is always a stable way to allocate risk.     

Collective Risk Management in a Flight to Quality Episode

Severe flight to quality episodes involve uncertainty about the environment, not only risk about asset payoffs. The uncertainty is triggered by unusual events and untested financial innovations that lead agents to question their worldview. We present a model of crises and central bank policy that incorporates Knightian uncertainty. The model explains crisis regularities such as market‐wide capital immobility, agents' disengagement from risk, and liquidity hoarding. We identify a social cost of these behaviors, and a benefit of a lender of last resort facility. The benefit is particularly high because public and private insurance are complements during uncertainty‐driven crises.     

The asset pricing effects of UK market liquidity shocks: Evidence from tick data

Using tick data covering a 12 year period including much of the recent financial crisis we provide an unprecedented examination of the relationship between liquidity and stock returns in the UK market. Previous research on liquidity using high frequency data omits the recent financial crisis and is focused on the US, which has a different market structure to the UK. We first construct several microstructure liquidity measures for FTSE All Share stocks, demonstrating that tick data reveal patterns in intra-day liquidity not observable with lower frequency daily data. Our asymptotic principal component analysis captures commonality in liquidity across stocks to construct systematic market liquidity factors. We find that cross-sectional differences in returns exist across portfolios sorted by liquidity risk. These are strongly robust to market, size and value risk. The inclusion of a momentum factor partially explains some of the liquidity premia but they remain statistically significant. However, during the crisis period a long liquidity risk strategy experiences significantly negative alphas.     

The impact of unconventional monetary policy on the market for collateral: The case of the French bond market

We consider the channel consisting in transferring the credit risk associated with refinancing operations between financial institutions to market participants. In particular, we analyze liquidity and volatility premia on the French government debt securities market, since these assets are used as collateral both in the open market operations of the ECB and on the interbank market. In our time-varying transition probability Markov-switching (TVTP-MS) model, we highlight the existence of two regimes. In one of them, which we refer to as the conventional regime, monetary policy neutrality is verified; in the other, which we dub the unconventional regime, monetary policy operations lead to volatility and liquidity premia on the collateral market. The existence of these conventional and unconventional regimes highlights some asymmetries in the conduct of monetary policy.     

Liquidity Coinsurance, Moral Hazard, and Financial Contagion

We study the propagation of financial crises among regions in which banks are protected by limited liability and may take excessive risk. The regions are affected by negatively correlated liquidity shocks, so liquidity coinsurance is Pareto improving. The moral hazard problem can be solved if banks are sufficiently capitalized. Under autarky a limited amount of capital is sufficient to prevent risk‐taking, but when financial markets are open capital becomes insufficient. Thus, bankruptcy occurs with positive probability and the crisis spreads to other regions via financial linkages. Opening financial markets is nevertheless Pareto improving; consumers benefit from liquidity coinsurance, although they pay the cost of excessive risk‐taking.     

Funding liquidity risk: Definition and measurement

Funding liquidity risk has played a key role in all historical banking crises. Nevertheless, a measure for funding liquidity risk based on publicly available data remains so far elusive. We address this gap by showing that aggressive bidding at central bank auctions reveals funding liquidity risk. We can extract an insurance premium from banks’ bids which we propose as a measure of funding liquidity risk. Using a unique data set consisting of all bids in all auctions for the main refinancing operation conducted at the ECB between June 2005 and October 2008 we find that funding liquidity risk is typically stable and low, with occasional spikes especially around key events during the recent crisis. We also document downward spirals between funding liquidity risk and market liquidity. As measurement without clear definitions is impossible, we initially provide definitions of funding liquidity and funding liquidity risk.     

Are European banks too big? Evidence on economies of scale

In light of the policy debate on too-big-to-fail we investigate evidence of economies of scale for 103 European listed banks over 2000–2011. Using the Stochastic Frontier Approach, the results show that economies of scale are widespread across different size classes of banks and are especially large for the biggest banks. At the country level, banks operating in the smallest financial systems and the countries most affected by the financial crises realize the lowest scale economies (including diseconomies) due to the reduction in production capacity. As for the determinants of scale economies, these mainly emanate from banks oriented toward investment banking, with higher liquidity, lower Tier 1 capital, those that contributed less to systemic risk during the crises, and those with too-big-to-fail status.     

Does monetary policy determine stock market liquidity? New evidence from the euro zone

The recent financial crisis has been characterized by unprecedented monetary policy interventions of central banks with the intention to stabilize financial markets and the real economy. This paper sheds light on the actual impact of monetary policy on stock liquidity and thereby addresses its role as a determinant of commonality in liquidity. Our results suggest that an expansionary monetary policy of the European Central Bank leads to an increase of aggregate stock market liquidity in the German, French and Italian markets. Furthermore, the effect of monetary policy is significantly stronger for smaller stocks, suggesting a non-linear impact of monetary policy on stock liquidity.     

The liquidity impact on firm values: The evidence of Taiwan's banking industry

Liquidity plays an important role in financial markets, especially during a financial crisis. New Basel III regulatory framework highlights the importance of liquidity risk management implemented by financial institutions. Moreover, updated International Financial Reporting Standards (IFRS) require the improvements about fair value measurements and reinforce existing principles for disclosures about the liquidity risk associated with financial instruments. Using the liquidity discount model of Chen (2012), we are able to empirically classify Taiwan's financial institutions into three liquidity categories: safe, crisis contagious and vulnerable. Our findings can serve as an early warning signal for liquidity calamity. In addition, we investigate what factors affect firm-specific liquidity discounts for these institutions and conduct a sub-period analysis, which examines whether there is significant liquidity discounts changes before and after the 2008 financial crisis. We find that liquidity discounts change substantially during the financial crisis. Furthermore, we find that liquidity discounts can be attributed to some firm-specific performance.     

Interest rate liberalization and capital adequacy in models of financial crises

We characterize the effects of interest rate liberalization on OECD banking crises, controlling for the standard macro prudential variables that prevail in the current literature. We use the Fraser Institute’s Economic Freedom of the World database. We test for the direct impacts of interest rate liberalization on crisis probabilities and their indirect effects via capital adequacy. Over the period 1980–2012, we find that interest rate liberalization has a crises reducing effect, and it appears that the beneficial effects work by strengthening capital buffers. We also show that when controlling for liberalization, capital adequacy and liquidity, the main driver of financial crises is property price growth. Our results are invariant when we control for alternative sensitivity tests for robustness purposes.     

货币政策和金融稳定

近期的金融危机使世界各国的中央银行加强了对金融稳定问题的关注,对货币政策目标的选择与实施更加慎重。为更好实现金融稳定目标,中央银行应根据具体情况,在宏观审慎政策与货币政策之间做好平衡,在不同种类的宏观审慎政策工具间做出选择。     

银行资产配置趋势与中央银行流动性管理——基于动力系统模型的模拟分析

近年来,我国宏观流动性投放逐步由以前的被动投放(外汇占款)向主动投放转变,银行业资产配置结构更趋多元化,金融创新更加活跃,这些都在一定程度上改变了金融体系流动性传导的渠道和机制,迫使我们重新审视流动性在金融体系中消长、转移的内在逻辑,探讨新形势下流动性管理的合理方式和路径。本文运用动力系统模型来分析和论证银行资产配置结构变化对市场流动性状况的影响机制,以及中央银行流动性管理工具的有效性。研究表明,银行资产配置趋势的同质化容易导致市场流动性状况的恶化;中央银行需要进一步完善利率传导机制,强化货币政策与宏观审慎评估政策的协同配合,以提升流动性管理的有效性。     

流动性覆盖率监管会影响货币政策传导效率吗？——来自中国银行业的证据

本文从流动性覆盖率监管要求出发,探讨了流动性监管与货币政策的协调机制问题。我们将流动性覆盖率监管要求纳入传统的Monti-Klein模型中,推导出流动性覆盖率监管对货币政策传导效率的影响及其作用机制。在此基础上,采用手工收集的我国65家商业银行2015—2019年半年度面板数据对理论假设进行实证检验。研究发现,流动性覆盖率监管要求会对货币政策传导效率产生影响,但这种影响取决于流动性监管约束下商业银行流动性管理行为的选择。商业银行主动调整融资结构、增强负债质量的行为在提高银行短期流动性水平的同时,也能显著提高货币政策传导效率,而流动性资产的囤积则可能降低货币政策传导效率。因此,应客观看待流动性覆盖率监管对货币政策传导效率的影响,引导商业银行的流动性管理行为,这将有助于实现流动性监管与货币政策有效传导的“双赢”目标。