Liquidity Risk and Collective Moral Hazard

Banks individually optimize their liquidity risk management, often neglecting the externalities generated by their choices on the overall risk of the financial system. However, banks may have incentives to optimize their choices not strictly at the individual level, but engaging instead in collective risk-taking strategies. In this paper we look for evidence of such behaviors in the run-up to the global financial crisis. We find strong and robust evidence of peer effects in banks' liquidity risk management. This suggests that incentives for collective risk-taking play a role in banks' choices, thus calling for a macroprudential approach to liquidity regulation.