Does Excessive Liquidity Creation Trigger Bank Failures?

Systemic Funding Liquidity Risk and Bank Failures

We examine the roles of idiosyncratic and systemic funding liquidity risks in bank failures. We estimate a discrete-time hazard model of bank failure using data of U.S. commercial banks between 1985 and 2004, and examine its out-of-sample forecasting performance between 2005 and 2011. The out-of-sample performance comparison shows this model outperforms typical bank failure prediction models. W...

Excessive Liquidity Preference

Any recession by definition is associated with an excessive liquidity preference. An ex ante excess supply of goods and services, i.e. the demand for goods and services falling short of the base output at the base prices corresponding to that output, which is what a recession is, must be associated with an ex ante excess demand for money at that output and prices. This is simply Walras’ Law. Th...

Bank mergers, competition and liquidity

We provide a model of the impact of bank mergers on loan competition, individual reserve management and aggregate liquidity risk. Banks hold reserves against liquidity shocks, refinance in the interbank market and compete in a differentiated loan market. A merger creates an internal money market that induces financial cost advantages and may increase reserve holdings. We assess the liquidity ri...

Bank Failures Caused by Large Withdrawals: An Explanation Based Purely on Liquidity∗

In a version of the Diamond and Dybvig [8] model with aggregate uncertainty, we show that there exists an equilibrium with the following properties: all consumers deposit at the bank, all patient consumers wait for the last period to withdraw, and the bank fails with strictly positive probability. Furthermore, we show that the probability of a bank failure remains bounded away from zero as the ...

Dynamic Shock Bank Liquidity Analysis