Working Paper
Strategic Liquidity Mismatch and Financial Sector Stability
Abstract: This paper examines whether banks strategically incorporate their competitors? liquidity mismatch policies when determining their own and how these collective decisions impact financial sector stability. Using a novel identification strategy exploiting the presence of partially overlapping peer groups, I show that banks? liquidity transformation activity is driven by that of their peers. These correlated decisions are concentrated on the asset side of riskier banks and are asymmetric, with mimicking occurring only when competitors are taking more risk. Accordingly, this strategic behavior increases banks? default risk and overall systemic risk, highlighting the importance of regulating liquidity risk from a macroprudential perspective.
Keywords: Financial stability; Liquidity mismatch;
JEL Classification: G01; G20; G21; G28;
https://doi.org/10.17016/FEDS.2019.082
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File(s): File format is application/pdf https://www.federalreserve.gov/econres/feds/files/2019082pap.pdf
Authors
Bibliographic Information
Provider: Board of Governors of the Federal Reserve System (U.S.)
Part of Series: Finance and Economics Discussion Series
Publication Date: 2019-11-25
Number: 2019-082
Pages: 64 pages