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. 1