BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 19/2008:
Liquidity matters: Evidence from the Russian interbank market
Alexei Kares ()
, Koen Schoors and Gleb Lanine
Abstract: We suggest an additional transmission channel of contagion
on the interbank market - the liquidity channel. Examining the Russian
banking sector, we and that the liquidity channel contributes significantly
to understanding and predicting interbank market crises. Interbank market
stability Granger causes the interbank market structure, while the opposite
causality is rejected. This bolsters the view that the interbank market
structure is endogenous. The results corroborate the thesis that prudential
regulation at the individual bank level is insufficient to prevent systemic
crises. We demonstrate that liquidity injections of a classical lender of
last resort can effectively mitigate coordination failures on the interbank
market both in theory and practice. Apparently, liquidity does matter.
Keywords: interbank market stability; contagion; liquidity channel; lender of last resort; Russia; (follow links to similar papers)
JEL-Codes: C80; G21; (follow links to similar papers)
27 pages, November 21, 2008
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