Working Paper: NBER ID: w27815
Authors: Qi Chen; Itay Goldstein; Zeqiong Huang; Rahul Vashishtha
Abstract: A key role of banks is liquidity transformation, which is also thought to create fragility, as uninsured depositors face an incentive to withdraw money before others (a so-called panic run). Despite much theoretical work, there has not been much empirical evidence establishing this mechanism. In this paper, we provide the first large-scale evidence of this mechanism. Banks that perform more liquidity transformation exhibit higher fragility, manifested by stronger sensitivities of uninsured deposit flows to bank performance and greater levels of uninsured deposit outflows when performance is poor. We also explore the effects of deposit insurance and systemic risk.
Keywords: liquidity transformation; bank fragility; uninsured deposits; bank performance
JEL Codes: E02; G01; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| liquidity transformation (E41) | bank fragility (F65) |
| asset illiquidity (G33) | sensitivity of uninsured deposit flows to bank performance (G21) |
| poor bank performance (G21) | outflows of uninsured deposits (F65) |
| higher liquidity transformation (G19) | greater outflows of uninsured deposits (F65) |
| liquidity transformation (E41) | likelihood of panic-based withdrawals (E44) |