Working Paper: NBER ID: w30340
Authors: Ren M. Stulz; Alvaro G. Taboada; Mathijs A. van Dijk
Abstract: Banks hold large amounts of liquid assets compared to non-financial firms and to before the global financial crisis (GFC). The transaction and precautionary motives for holding liquid assets cannot explain the size and evolution of bank liquid asset holdings. We introduce a portfolio motive that leads banks to invest in liquid assets when they have exhausted their ability to make profitable loans. With this motive, loans and liquid assets are substitutes. Post-GFC capital requirement increases lowered the profitability of loans relative to liquid assets and help explain why liquid asset holdings are larger and more so for large banks.
Keywords: bank liquid asset holdings; financial crisis; lending opportunities; regulatory changes
JEL Codes: G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lending opportunities (F34) | liquid asset holdings (G19) |
| regulatory changes (G18) | higher liquid asset holdings (D14) |
| liquidity coverage ratios and capital requirements (G28) | liquid asset holdings (G19) |
| improvement in lending opportunities (G21) | decrease in liquid asset holdings (E41) |