Managing Bank Liquidity Risk: How Deposit-Loan Synergies Vary with Market Conditions

Abstract

Liquidity risk in banking has been attributed to transactions deposits and their potential to spark runs or panics. We show instead that transactions deposits help banks hedge liquidity risk from unused loan commitments. Bank stock-return volatility increases with unused commitments, but the increase is smaller for banks with high levels of transactions deposits. This deposit-lending risk management synergy becomes more powerful during periods of tight liquidity, when nervous investors move funds into their banks. Our results reverse the standard notion of liquidity risk at banks, where runs from depositors had been seen as the cause of trouble.

Funding Liquidity without Banks: Evidence from a Shock to the Cost of Very Short‐Term Debt

“…6 We thank an anonymous referee for helping us frame our tax shock this way. 7 Most existing studies of banks as liquidity suppliers focus on why banks combine deposits with credit lines (e.g., Kashyap, Rajan, and Stein (2002), Gatev and Strahan (2006), Gatev, Schuermann, and Strahan (2009)) and how lines are used, but do not explore substitution into trade credit, as we do. See also Jiménez, Lopez, andSaurina (2009), Ivashina andScharfstein (2010), and Campello et al (2011).…”

Securitization and the Declining Impact of Bank Finance on Loan Supply: Evidence from Mortgage Originations

“…This result suggests that the increasing depth of the mortgage secondary market fostered by securitization has reduced the effect of lender's financial condition on credit supply. (2002), Gatev and Strahan (2006), Gatev, Schuermann, and Strahan (2005), and Gatev, Schuermann, and Strahan (2007 show that bank liquidity production also now stems from the asset side via loan commitments and lines of credit, but that this liquidity risk tends to be offset or diversified by funding through transactions deposits. 861 about the resulting expansion of interest rate risk at the GSEs (Greenspan (2004)).…”

The Nature and Determinants of High-value Household Deposits in the Euro Area

“…They include sources of funding for banks (Diamond & Rajan 2001, Borio 2009, Huang & Ratnovski 2011, financial assets held by households (Du Caju 2013), the connections between the limits of deposit insurance systems (DIS) and the way that individuals perceive risk (Karas, Pyle & Schoors 2013, Brown, Guin & Morkoetter 2013, Acharya & Mora 2015, the relationship between deposit outflows and incidents of financial turmoil (Cussen, O'Leary & Smith 2012), the links between downturns on commercial paper markets and deposit transfers (Pennacchi 2006, Gatev, Schuermann & Strahan 2009), the impact of interest rates on deposit outflows (Acharya & Mora 2012) and the correlation between deposit outflows and loan availability (Acharya, Almeida & Campello 2013). Some papers compare countries according to the purposes of household saving, with a focus on deposits as a component of household financial asset portfolios (Teppa et al 2015).…”