When liquidity risk becomes a systemic issue: Empirical evidence of bank behaviour

This article provides empirical evidence of behavioural responses by banks in the recent crisis. Using firm-specific balance sheet data, we construct aggregate indicators of systemic risk. Measures of size and herding show that balance sheet adjustments have been pro-cyclical in the crisis, while responses became increasingly dependent across banks and concentrated on certain market segments. Banks reacted less according to a pecking order, as an indication of reduced flexibility in their risk management opportunities. The behavioural indicators are useful tools for monetary and macro prudential analyses and can contribute to the micro foundations of financial stability models.

► We construct indicators of systemic liquidity risk, based on firm specific data of Dutch banks. ► The indicators show that the time and cross sectional dimensions of macro prudential risks substantially changed during the crisis. ► The indicators reflect an increased size, number and similarity of banks’ responses, on certain market segments in particular. ► The analysis underscores the relevance of using various indicators, given the different leads and lags with regard to systemic risk.