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

Funding Information:
We thank the editor, Rafael Repullo, two anonymous referees, Rui Albu-querque, Paolo Angelini, António Antunes, Frederico Belo, Jan Marc Berk, Sig-bjorn Berg, Arnoud Boot, Rosa Borges, Christa Bouwman, Martin Brown, Max Bruche, Jin Cao, Geraldo Cerqueiro, Ilan Cooper, Lammertjan Dam, Eduardo Dávila, Hans Degryse, John Driscoll, Jan Willem Van Den End, Falko Fecht, José Fique, Ralph de Haas, Florian Heider, Michael Koetter, Thea Kloster, Jan Pieter Krahnen, Ana Cristina Leal, Iman van Lelyveld, Antoine Martin, Jean-Stéphane Mésonnier, Steven Ongena, Ettore Panetti, Wayne Passmore, Alberto Pozzolo, Isabel Proença, Lev Ratnovski, Francisca Rebelo, Hugo Reis, Nuno Ribeiro, Kasper Roszbach, Abdelaziz Rouabah, Martín Saldías, Javier Suarez, Razvan Vlahu, Wolf Wagner, and participants in seminars in the Deutsche Bun-desbank and in the University of Groningen, in the EEA 2014, IBEFA 2014 Summer Meeting, Day Ahead Conference 2013 at the Bank of England, PET 2013 Conference, 5th Banco de Portugal Conference on Financial Intermediation, 2nd MoFiR Workshop on Banking, 6th CEPR Winter Conference on Financial Intermediation, 4th Financial Stability Conference in Tilburg, EBA Research Workshop on Banks’ Business Models After the Crisis: Incentives, Strategies, De-risking, PFN2012, and CREDIT 2011 for insightful comments and suggestions. This paper was previously circulated with the title “Liquidity Risk in Banking: Is There Herding?”. The analyses, opinions, and findings of this paper represent the views of the authors, which are not necessarily those of Banco de Portugal or the Eurosystem.

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

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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