Bank's Liquidity Demand in the Presence of a Lender of Last Resort

Universidad de San Andres, Departamento de Economia, Working Papers 01/2003;
Source: RePEc

ABSTRACT This paper examines the volatility of capital flows following the liberalization of financial markets. Utilizing a panel data set of overlapping data, the paper focuses on the response of foreign direct investment, portfolio flows, and other debt flows to financial liberalization. The financial liberalization variable comes from the chronology and index developed by Kaminsky and Schmukler [Kaminsky, G.L. and Schmukler, S.L., 2003, Short-run pain, long-run gain: The effects of financial liberalization, IMF Working Paper WP/03/34.]. Different types of capital flows are found to respond differently to financial liberalization. Surprisingly, portfolio flows appear to show little response to capital liberalization while foreign direct investment flows show significant increases in volatility, particularly for the emerging markets considered.

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    ABSTRACT: This paper provides a first comprehensive analysis of the determinants of UK banks' liquidity policy. We study both idiosyncratic and macro- determinants of banks' liquidity buffers. In particular, we investigate how central bank LOLR policy may affect banks' liquidity buffers. We find that the greater the potential support from the central bank in case of liquidity crises, the lower the liquidity buffer the banks hold. A second finding relates to the way liquidity buffers vary over the economic cycle: UK banks appear to pursue a counter-cyclical liquidity policy, with liquidity lower in upturns. In the spirit of Almeida et al (2004), we finally test whether countercyclical liquidity buffers might be the result of financial constraints on banks' lending policy and find support for this hypothesis. Using these findings the paper draws out a number of implications for banking regulation.