Journal of Banking & Finance Vol. 28 No. 6 2004
Optimal liquidity management and bail-out policy in the banking industry
Abstract
We characterize the profit-maximizing reserves of a commercial bank, and the generated probability of a liquidity crisis, as a function of the penalty imposed by the Central Bank, the probability of depositors' liquidity needs, and the return on outside investment opportunities. We demonstrate that banks do not fully internalize the social cost associated with the bail-out policy if the liquidity needs of individuals are correlated, and that competitive interbank markets will induce banks to raise their reserves under reasonable conditions. The marginal benefits from an interbank market decrease as the correlation between the liquidity shocks of banks increases.
- DOI
- 10.1016/s0378-4266(03)00121-3
- Volume
- 28
- Issue
- 6
- Pages
- 1319-1335
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib