Managing Banks Liquidity Risk with Interbank Market Liquidity in Nigeria: Matters Arising
DOI:
https://doi.org/10.54741/ssjar.2.4.4Keywords:
regulation, liquidity, risk, bank, intermediationAbstract
This paper articulates with an exploratory research design further thinking on the issues arising from the Nigerian inter-bank market as central bank of Nigeria review and implement monetary policy to ensure availability of funds for effective management of bank’s liquidity risk. Aside from inefficiencies arising from interaction of market forces, regulatory interventions sometimes hinder the effective allocation of funds in the market. For instance, the upward review of cash reserve requirements (CRR) on public sector funds with commercial banks by the central bank of Nigeria resulted in various market inefficiencies which include inter-bank market rate volatility, scarcity of funds, hoarding and utilization of market power by big banks. Similar policy impulse was unleashed on the Nigerian banking system in 1988 and 1989 when the central bank of Nigeria directed banks to lodge naira backing for foreign exchange application and further transfer public sector deposits to the apex bank.
Downloads
References
Acharya, V. V., Gromb, D., & Yorulmazer, T. (2011). Imperfect competition in the interbank market for liquidity as a rationale for central banking. INSEAD Faculty and Research, Working Paper, 2011/41/FIN.
Acharya, V., & Yorulmazer,T. (2008). Cash-in-the-market pricing and optimal resolution of bank failures. Review of Financial Studies, 21(6), 2705-2742.
Ahumada, L. A, A. Garcia, L. Opazo, & Selaive, J. (2009). Interbank rate and the liquidity of the market. Central Bank of Chile, Working Papers No. 516.
Akram, Q. F., & Christophersen, C. (2010). Interbank overnight interest rates-gains from systemic importance. Norges Bank Working Paper, 2010/11.
Allen N. Berger, & Christa H. S. Bouwman. (2009). Bank liquidity creation. The Review of Financial Studies, 22(9), 3779-3837.
Allen, F., Carletti, E., & Gale, D. (2009). Interbank market liquidity and central bank intervention. European University Institute Working Paper, ECO 2009/09.
Allen, F., & Gale, D. (2000a). Financial contagion. Journal of Political Economy, 108, 1-33.
Allen, F., & D. Gale. (2000b). Asset price bubbles and monetary policy. Working Papers 01-26, Centre for Financial Institutions, Wharton School Centre for Financial Institutions, University of Pennsylvania.
Ashcraft, A., McAndrews, J., & Skeie, D. (2009). Precautionary reserves and the interbank market. Federal Reserve Bank of New York Staff Reports No. 370.
Aziakpono M, Wilson, M. K., & Manuel, J. (2007). Adjustment of commercial bank’s interest rates and the effectiveness of monetary policy in South Africa. The African Finance Journal, 9(1), 1-20.
Bank for International Settlements (BIS). (2008). Principles for sound liquidity risk management and supervision.
Bank for International Settlements (BIS). (2010). Basel 111: International framework for liquidity risk measurement. Standards and Monitoring.
Bhattacharya, S., & Gale, D. (1987). Preference shocks, liquidity and central bank policy. In: W. Barnett and K. Singleton, eds. New Approaches to Monetary Economics, Cambridge University Press, pp. 69-88.
Berger, L., & Bouwman, E. (2009). Uncertain liquidity and interbank contracting. Economics Letters, 44, 287-294.
Bordo, M. D. (1990). The lender of last resort: alternative views and historical experience. Federal Reserve Bank of Richmond Economic Review, 18-29.
Boyd, J., & E. E. Prescott, E.E. (1986). Financial intermediary-coalitions. Journal of Economic Theory, 38, 211-232.
Boot, A. (2000). Relationship banking: What do we know?. Journal of Financial Intermediation, 9, 7-25.
Bryant, J. (1980). A model of reserves, bank runs, and deposit insurance. Journal of Banking and Finance, 4, 335-44.
Bulus, Y. D. (2010). The Nigeria interbank and monetary policy rates nexus: Any discernable long-run relationship?. Economic and Financial Review, Central Bank of Nigeria, 48(2), 1-24.
Business Day. (2013). Banks under pressure over planned AMCON fund deductions. pp. 1 & 4.
Caballero, R., & Krishnamurthy, A. (2008). Collective risk management in a flight to quality episode. Journal of Finance, 63(5), 2195-2230.
Calomiris, C., & Kahn, C. (1991). The efficiency of self-regulated payments systems: Learning from the Suffolk System. Journal of Money, Credit, and Banking, 28, 766-97.
Carlin, B., Lobo, M., & Viswanathan, S. (2007). Episodic liquidity crises: The effect of predatory and cooperative trading. Journal Finance, 62, 2235–2274.
Central Bank of Nigeria. (1996). Annual reports and accounts.
Central Bank of Nigeria. (1997). Annual reports and accounts.
Central Bank of Nigeria. (1998). Annual reports and accounts.
Central Bank of Nigeria. (2008). Annual reports and accounts.
Chari, C., & Jagannathan, R. (1988). Banking panics, information, and rational expectations equilibrium. Journal of Finance, 43, 149-761.
Chete, L. N. (2001). The Nigerian banking crisis: What role did the macroeconomy play?. Savings and Development, 25(1), 81-102.
Cocco, J. F. (2005). Lending relationship in the interbank market. In: Conference on Competition, Stability and Integration in European Banking. London.
Cocco, J. F., Gomes, F.J., & Martins, N.C. (2009). Lending relationships in the interbank market. Journal of Financial Intermediation, 18, 24-48.
Daily Newswatch. (2013). Banks under Pressure over public sector deposit, pp.17.
Daily Newswatch. (2013). CRR hike will cause inflation, pp. 21.
Dale, S. (1993). The effect of changes in official U.K. rates on market interest rates since 1987. The Manchester School, 61, 76-94.
Diamond, D .W. (1984). Financial intermediation and delegated monitoring. Review of Economic Studies, 51, 393-414.
Diamond, D. W., & Rajan, R.G. (2001). Liquidity risk, liquidity creation, and financial fragility: A theory of banking. Journal of Political Economy, 109, 287-327.
Diamond, D., & Rajan, R. (2005). Liquidity shortages and banking crises. Journal of Finance, 60(2), 615-647.
Diamond, D., & Dybvig, P. (1983). Bank runs, deposit insurance and liquidity. Journal of Political Economy, 91(3), 401-19.
Donaldson, R. G. (1992). Costly liquidation, interbank trade, bank runs and panics. Journal of Financial Intermediation, 2, 59-85.
Ennis, H. M., & Weinberg, J.A. (2007). Interest on reserves and daylight credit. Federal Reserve Bank of Richmond Economic Quarterly, 93, 111-142.
Fama, E. F. (1985). What's different about banks?. Journal of Monetary Economics, 15, 29-39.
Flannery, M. (1996). Financial crises, payments system problems and discount window lending. Journal of Money, Credit and Banking, 28, 804-824.
Freixas X., & Jorge J. (2008). The role of interbank markets in monetary policy: A model with rationing. Journal of Money, Credit and Banking, 40(6), 1151-1176.
Freixas, X., Antoine, M., & Skeie, D. (2009). Bank liquidity, interbank markets, and monetary policy. Federal Reserve Bank of New York Staff Reports No 371. Revised September.
Freixas, X., Parigi, B., & Rochet, J.C. (2000). Systematic risk, interbank relations, and liquidity provisions by the central bank. Journal of Money, Credit and Banking, 32(3), 611-638.
Freixas, X., & Holthausen, G. (2004). Interbank market integration under asymmetric information. Review of Financial Studies, 18(2), 459-490.
Furfine, C. (2002). Interbank market in a crisis. European Finance Review, 46, 809-820.
Gatev, E., & Strahan, P.E. (2006). Banks’ advantage in hedging liquidity risk: Theory and evidence from the commercial paper market. Journal of Finance, 61, 867-92.
Gatev E., Til Schuermann, & Strahan, P.E. (2009). Managing bank liquidity risk: how deposit-loan synergies vary with market conditions. The Review of Financial Studies, 22(3), 995-1020.
Gatev, E., T. Schuermann, & Strahan, P. E. (2004). How do banks manage liquidity risk? evidence from the equity and deposit markets in the fall of 1998. National Bureau of Economic Research (NBER) Working Paper 10982.
Goldstein I., & Pauzner, A. (2005). Demand deposit contracts and the probability of bank runs. The Journal of Finance, 60(3), 1293-1327.
Goodfriend, M., & King, R.G. (1988). Financial deregulation, monetary policy and central banking. Federal Reserve Bank of Richmond Economic Review, 74(3).
Gorton H., & Huang, L. (2004). Liquidity, efficiency and bank bailout. American Economic Review, 94, 455-483.
Gorton, G. (1985). Bank suspension of convertibility. Journal of Monetary Economics, 15, 177-193.
Gorton, G., & Huang, L. (2004). Bank panics and the endogeneity of central banking. Journal of Monetary Economics, 53(7), 1613-29.
Gorton, G., & Huang, L. (2006). Banking panics and the origin of central banking. American Economic Review, 94(3), 455-483.
Hamilton, J. (1996). The daily market for federal funds. Journal of Political Economy, 104(1), 26-56.
Hartmann P. M. M., & Manzanares, A. (2001). The microstructure of the euro money market. European Central Bank, Working Paper. No. 80.
Heider F., Hoerova, M., & Holthausen, C. (2008). Information asymmetries in the interbank market: Theory and policy responses. Mimeo, European Central Bank, Frankfurt.
Holmstrom, B., & Tirole, J. (1998). Private and public supply of liquidity. Journal of Political Economy, 106, 1-40.
Jacklin, C.J. (1987). Demand deposits, trading restrictions and risk sharing. In: E.C. Prescott and N. Wallace, eds., Contractual Arrangements for Intertemporal Trade (University of Minnesota Press, Minneapolis, MN).
Jacklin, C.J., & Bhattacharya, S. (1988). Distinguishing panics and information-based bank runs: Welfare and policy implications. Journal of Political Economy, 96, 568-592.
Kashyap, A. K., & Stein, J. C. (2010). What do a million observations on banks say about the transmission of monetary policy. The American Economic Review, 90(3), 407-428.
Kashyap, A. K., Rajan, R.G., & Stein, J. C. (2002). Banks as liquidity providers: An explanation for the coexistence of lending and deposit-taking. Journal of Finance, 57, 33-73.
Kaufman, G. (1991). Lender of last resort: A contemporary perspective. Journal of Financial Services Research, 5, 95-110.
Kharroubi, E., & Vidon, E. (2009). Liquidity, moral hazard and inter-bank market collapse. CREI Conference Paper, Barcelona.
King, T. B. (2008). Discipline and liquidity in the interbank market. Journal of Money, Credit and Banking, 40(2/3), 295-317.
McAndrews, J. Sarkar, A., & Wang, Z. (2008). The effect of the term auction facility on the London inter-bank offered rate. Federal Reserve Bank of New York Staff Reports No. 335.
Neyer, U., & Wiemers, J. (2003). Why do we have an interbank money market? Halle institute for economic research. Discussion Paper, No.182.
Perez-Quiros, G., & Rodriguez-Mendizabal, H. (2006). The daily market for funds in Europe: What has changed with the EMU?. Journal of Money, Credit, and Banking, 38, 91-118.
Qi, J. (1994). Bank liquidity and stability in an overlapping generations model. The Review of financial Studies, 7(2), 389-417.
Repullo, R. (2005). Liquidity, risk taking, and the lender of last resort. International Journal of Central Banking, 1, 47-80.
Rochet, Jean-Charles, & Tirole, J. (1996). Interbank lending and systemic risk. Journal of Money, Credit and Banking, 28, 733-762.
Rochet, Jean-Charles, & Xavier, V. (2004). Coordination failure and the lender of last resort: Was bagehot right after all?. Journal of the European Economic Association, 2(6), 1116-1147.
Roley, V. V., & Sellon, G. H. (1995). Monetary policy actions and long-term interest rates. Federal Reserve Bank of Kansas City, Economic Review, 80 (Fourth Quarter,), pp. 73-89.
Schwartz, A.J. (1992). The misuse of the fed’s discount window. Federal Reserve Bank of St. Louis Review, pp. 58-69.
Smith, B. (1984). Deposit interest rate controls. Journal of Monetary Economics, 14, 293-317.
Stigum, M. (1990). The money market. Dow-Jones Irwin.
Taylor, J., & Williams, J. (2008). A black swan in the money market. Mimeograph.
Whitesell, William. (2006a). Interest rate corridors and reserves. Journal of Monetary Economics, 53, 1177-1195.
Whitesell, W. (2006b). Monetary policy implementation without averaging or rate corridors. Finance and Economics Discussion Series Paper 2006-22, Federal Reserve Board.
Wurtz, F. R. (2003). A comprehensive model on the euro overnight rate. Working Paper Series. No. 207. European Central Bank.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2022 Etini Usenideh Archibong, Comfort Amaka Nwude, E. Chuke Nwude
This work is licensed under a Creative Commons Attribution 4.0 International License.
