Liquidity risk and collective moral hazard

Diana Bonfim, Moshe Kim

Research output: Contribution to journalArticlepeer-review

Abstract

Banks individually optimize their liquidity risk manage-ment, often neglecting the externalities generated by their choices on the overall risk of the financial system. However, banks may have incentives to optimize their choices not strictly at the individual level, but engaging instead in collective risk-taking strategies. In this paper we look for evidence of such behaviors in the run-up to the global financial crisis. We find strong and robust evidence of peer effects in banks’ liquidity risk management. This suggests that incentives for collective risk-taking play a role in banks’ choices, thus calling for a macroprudential approach to liquidity regulation.

Original languageEnglish
Pages (from-to)101-150
Number of pages50
JournalInternational Journal of Central Banking
Volume15
Issue number2
StatePublished - Jun 2019

Bibliographical note

Publisher Copyright:
© 2019, European Central Bank. All rights reserved.

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Fingerprint

Dive into the research topics of 'Liquidity risk and collective moral hazard'. Together they form a unique fingerprint.

Cite this