To what extent does the Central Bank Bailout induce to Banks Moral Hazard and a Higher Liquidity Risk Appetite? Evidence of Tunisian Behavior
To what extent does the Central Bank Bailout induce to Banks Moral Hazard and a Higher Liquidity Risk Appetite? Evidence of Tunisian Behavior

Summary/Abstract: In this paper, we investigate the effects of bank liquidity needs on the monetary authority’s reaction. Based on time series decomposition by filter Hodrick Prescott methods, and over the period stretching between January 1990 and December 2010. We find that the liquidity resources are unsteady and insufficient, whereas liabilities are higher and unsteady. Based on MCO regression and lagged operator technic, we study the efficiencies of the Tunisian central bank interventions. It was found that, in Tunisia, the lender of last resort intervenes in the monetary market not by giving assistance to illiquid banks, but to avoid inflation. The bank liquidity need is in some way neglected by monetary authorities although it has a short term and steady effect on the central bank reaction. At any moment, the central bank resolves this problem by injecting liquidity as a temporary solution. It’s recommended to central bank to distinct between banks bailout strategy and monetary policy to bring the bank to investigate on liquidity gap resources. Results also, implicitly show that in Tunisia, the lender of last resort abusive reaction may create incentives for banks to take on excessive risk and moral hazard problem between banker and monetary authorities. Indeed, liquidity shortage risk remains the responsibility of banker management and in the crises situation of the central bank incentive due to the negative externalities associated with bank failures.

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