Do Banks Differently Set Their Liquidity Ratios Based on Their Network Characteristics?

Posted: 25 Jun 2016 Last revised: 26 Mar 2020

See all articles by Isabelle Distinguin

Isabelle Distinguin

Université de Limoges, LAPE

Aref Mahdavi Ardekani

University of Paris 1 Pantheon-Sorbonne, CES; Université de Limoges, LAPE

Amine Tarazi

University of Limoges - Laboratoire d'Analyse et de Prospectives Économiques (LAPE); University of Limoges - Faculty of Law and Economic Science

Date Written: December 3, 2016

Abstract

This paper investigates the impact of interbank network topology on bank liquidity ratios. Whereas This paper investigates the impact of interbank network topology on bank liquidity ratios. Whereas more emphasis has been put on liquidity requirements by regulators since the global financial crisis of 2007-2008, how differently shaped interbank networks impact individual bank liquidity behavior remains an open issue. We look at how bank interconnectedness within interbank loan and deposit networks affects their decision to hold more or less liquidity during normal times and distress times and depending on the overall size of the banking sector. Our sample consists of commercial, investment, real estate and mortgage banks established in 28 European countries. We conduct instrumental variable estimations to examine the relationship between interbank network topology and bank liquidity. Our results show that taking into account the way that banks are linked to each other within a network adds value to traditional liquidity models. Our findings have critical implications with regards to the implementation of Basel III liquidity requirements and bank supervision more generally.

Keywords: Interbank network topology, Basel III, Liquidity risk, Financial Crisis

JEL Classification: G32, G21, G28, G01

Suggested Citation

Distinguin, Isabelle and Mahdavi Ardekani, Aref and Tarazi, Amine, Do Banks Differently Set Their Liquidity Ratios Based on Their Network Characteristics? (December 3, 2016). 29th Australasian Finance and Banking Conference 2016, Available at SSRN: https://ssrn.com/abstract=2799823 or http://dx.doi.org/10.2139/ssrn.2799823

Isabelle Distinguin

Université de Limoges, LAPE ( email )

5 rue Félix Eboué BP3127
LIMOGES, 87031
France

Aref Mahdavi Ardekani (Contact Author)

University of Paris 1 Pantheon-Sorbonne, CES ( email )

106-112 Boulevard de l'hopital
106-112 Boulevard de l'Hôpital
Paris Cedex 13, 75647
France

Université de Limoges, LAPE

5 rue Félix Eboué BP3127
LIMOGES, 87031
France

Amine Tarazi

University of Limoges - Laboratoire d'Analyse et de Prospectives Économiques (LAPE) ( email )

5 rue Félix Eboué
BP 3127
Limoges Cedex 1, 87031
France

University of Limoges - Faculty of Law and Economic Science ( email )

5 rue Felix Eboue
Limoges, 87000
France

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