Working Paper: NBER ID: w12234
Authors: Evan Gatev; Til Schuermann; Philip E. Strahan
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.
Keywords: liquidity risk; banking; transactions deposits; loan commitments
JEL Codes: G18; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| transactions deposits (F33) | liquidity risk exposure (G33) |
| unused loan commitments (H81) | stock return volatility (G17) |
| transactions deposits (F33) | unused loan commitments (H81) |
| transactions deposits + unused loan commitments (G29) | stock return volatility (G17) |
| market conditions (tight liquidity) (E44) | transactions deposits' hedging effect (F31) |