Financial Instability, Liquidity Constraints and Banks’ Borrowing Behaviour

29 Pages Posted: 9 Aug 2012

Date Written: August 8, 2012


Financial instability and liquidity management by banks is often the most debated topic in the area of monetary economics. This study examines an emerging economy’s banking system and contributes to the evolving body of literature on the topic of banks’ borrowing behaviour during financial instability and liquidity constraints. By employing cointegration technique, the study shows that interbank borrowing has a significant impact on the bank credit, and an inverse relationship with deposit mobilisation activity during the financial crisis. Accordingly, we suggest that banks could increase their interbank borrowing to tide over the liquidity constraints during the recession periods. We also suggest that the Central Banks and the Governments have significant role to play to enhance interbank borrowing by employing appropriate monetary policies during recessionary periods.

Keywords: Time-Series Models, Financial Markets, Financial Crisis, Interest Rates, Interbank Market, Credit, Central Banks, Banks and Financial Institutions

JEL Classification: C22, D53, E32, E43, E44, E51, E58, G1, G21

Suggested Citation

P.M., Vighneswara Swamy, Financial Instability, Liquidity Constraints and Banks’ Borrowing Behaviour (August 8, 2012). Available at SSRN: or

Vighneswara Swamy P.M. (Contact Author)

IBS-Hyderabad ( email )

62, Nagarjuna Hill
Hyderabad, TX AP 501504

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