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LIQUID RESERVES ACCUMULATION DURING THE FINANCIAL CRISIS. EMPIRICAL EVIDENCE FROM THE EUROPEAN BANKING SYSTEM
Alin Marius Andries, Emilia Corovei, Simona Mutu

ABSTRACT. This paper provides empirical evidence of the main drivers of liquid reserves accumulation in the European banking system during 2004-2011 by using bank-specific balance sheet data. The authors of this article propose a time-varying approach to distinguish between the liquidity hoarding and non-hoarding banks, which considers a certain threshold for the liquid assets to deposits and short term funding ratio. The incentives of the liquid reserves accumulation are assessed through a dynamic panel specification using the First Differenced-GMM estimator of Arellano and Bond (1991). The empirical results show that the funding constraints, structural balance sheet risk and a low profitability ratio enhance banks to provision the liquid reserves. A contraction in the lending activity determines the increase of the liquidity buffers, while the reduction of the derivatives portfolio has an opposite effect. Moreover, smaller and less capitalized banks present more incentives to accumulate the liquid assets in respect to funding the liquidity shocks. The findings are of great importance for the banks and financial supervisory authorities especially during the stress periods .

KEYWORDS: liquidity hoarding, banking, financial crisis, risk management.

JEL classification: G01, G21.