Precautionary Hoarding of Liquidity and Inter-Bank Markets: Evidence from the Sub-prime Crisis. Ouarda Merrouche Bank of England (with Viral V. Acharya, London Business School) PRELIMINARY-COMMENTS WELCOME 5 September 2008. FS252347. Importance of money markets.
Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.
Precautionary Hoarding of Liquidity and Inter-Bank Markets: Evidence from the Sub-prime Crisis
Bank of England
(with Viral V. Acharya, London Business School)
5 September 2008
“ It is unclear to what extent hoarding of liquidity reflects a genuine need to stem rising losses, and to what extent it reflects an extremely precautionary behavior driven by high uncertainty…”
– Marco Annunziata, chief economist at UniCredit bank
September 11th 2007
March 13th 2008
“UK banks asked to increase sharply the reserves they hold on deposit at the Bank this month to the highest ever level amid concerns that the instability of the banking system could suddenly leave them desperate for cash. They fear another bank crisis - akin to the collapse of US investment bank Bear Stearns - could see the market seize up.
Banks have asked to keep total reserves of £23.54bn on deposit that they can borrow to meet short-term financing needs if they cannot borrow in the inter-bank market. This is up from the nearly £20bn they had on deposit until yesterday. This is money the banks keep on deposit at the Bank, earning interest, but that they can access when the cost of borrowing from other banks becomes too high.”
Overnight Secured Rate = Gilt Repo Rate
Overnight Unsecured Rate = SONIA Rate
3-Months Secured = Gilt Repo Rate
3-Months Unsecured = 3-Months Libor
3-Months Unsecured volume = CHAPS 3-months volume, extracted using Furfine (1998) algorithm
Difference Post August 9th – Pre August 9th
CHAPS payment activity value and volume
Net of overnight inter-bank loans, in logarithm and in bank-level regressions, scaled by subtracting mean and dividing by standard deviation
High value for same volume = Larger transactions, greater risk
High volume for same value = Smaller transactions, lower risk