Liquidity Risk and Banks' Bidding Behavior: Evidence from the Global Financial Crisis

Even in countries that were not directly hit by the global financial crisis and where the banking system had a relatively strong liquidity position, there has been a negative spiral between the market and funding liquidity. We illustrate this on a case study of the Czech banking system. We construct indices of market and funding liquidity using daily market data, including data on banks' bidding behavior in repo operations of the Czech National Bank. We find some evidence of a negative feedback effect between market and funding liquidity, especially after the collapse of Lehman Brothers in September 2008.