Abstract

Co-author: Frank Heid (Deutsche Bundesbank)

This paper estimates spillover or contagion effects in bank liquidity for a panel of German banks. To estimate liquidity spillover effects, a spatial econometric approach is adopted, in which an economic distance is introduced that describes the connectedness between each pair of banks. This distance is constructed using interbank lending operations. Given this distance measure, the set of banks form a network, and spillover effects can be estimated in this network by employing the spatial autoregressive model. The results from the instrumental variable estimation indicate that there is a positive and significant liquidity spillover effect for the period of 2008 to 2013. Furthermore, spatial impulse response functions are estimated suggesting that shocks liquidity in this network are not very persistent over time since they do not diffuse over a horizon longer than one week.