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

Evan Gatev¹; Til Schuermann²; Philip E. Strahan³

¹ Boston College · ² Federal Reserve Bank of New York · ³ National Bureau of Economic Research

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 only for banks with low levels of transactions deposits. This deposit-lending hedge 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. The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: [email protected], Oxford University Press.

DOI

10.1093/rfs/hhm060

Volume

22 (3)

Pages

995-1020

Language

en

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BibTeX

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