The price of liquidity:bank characteristics and market conditions

We study differences in the price paid for liquidity across banks using price data atthe individual bank level. Unique to this paper, we also have data on individualbanks’ reserve requirements and actual reserve holdings, thus allowing us to gaugethe extent to which a bank is short or long liquidity. We find that the price a bankpays for liquidity depends on the liquidity positions of other banks, as well as itsown. There is evidence that liquidity squeezes occasionally occur and short bankspay more the larger is the potential for a squeeze. The price paid for liquidity isdecreasing in bank size and small banks are more adversely affected by an increasedpotential for a squeeze. Contrary to what one might expect, banks in formal liquiditynetworks do not pay less...