Higher liquidity levels can reduce banks’ funding costs, research finds
Doubling the liquid asset ratio is found to reduce the costs of insurance against default by 24.4%
Higher liquidity levels may help financial institutions not just avoid the worst effects of a credit crunch but also reduce their funding costs, according to a working paper published by the Bank of England.
Bank liquidity and the cost of debt by Sam Miller and Rhiannon Sowerbutts creates a model of bank runs similar to the one experienced during the great recession, when even solvent institutions may fail due to lack of liquidity.
Miller and Sowerbutts find that increasing the liquid asset
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