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Banks as Liquidity Providers: an Explanation for the Co-Existence of Lending and Deposit-Taking


Anil K. Kashyap


University of Chicago, Booth School of Business; National Bureau of Economic Research (NBER); Federal Reserve Bank of Chicago

Raghuram G. Rajan


University of Chicago - Booth School of Business; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)

Jeremy C. Stein


Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

February 1999

NBER Working Paper No. w6962

Abstract:     
This paper addresses the following question: what ties together the traditional commercial banking activities of deposit-taking and lending? We begin by observing that since banks often lend via commitments, or credit lines, their lending and deposit-taking may be two manifestations of the same primitive function: the provision of liquidity on demand. After all, once the decision to extend a line of credit has been made, it is really nothing more than a checking account with overdraft privileges. This observation leads us to argue that there will naturally be synergies between the two activities, to the extent that both require banks to hold large volumes of liquid assets (cash and securities) on their balance sheets: if deposit withdrawals and commitment takedowns are imperfectly correlated, the two activities can share any deadweight costs of holding the liquid assets. We develop this idea with a simple model, and then use a variety of data to test the model's empirical implications.

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Date posted: March 23, 1999  

Suggested Citation

Kashyap, Anil K. and Rajan, Raghuram G. and Stein, Jeremy C., Banks as Liquidity Providers: an Explanation for the Co-Existence of Lending and Deposit-Taking (February 1999). NBER Working Paper No. w6962. Available at SSRN: http://ssrn.com/abstract=151733

Contact Information

Anil K. Kashyap
University of Chicago, Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7260 (Phone)
773 702-0458 (Fax)
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
773-702-7260 (Phone)
773-702-0458 (Fax)
Federal Reserve Bank of Chicago ( email )
230 South LaSalle Street
Chicago, IL 60604
United States
Raghuram G. Rajan
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-4437 (Phone)
773-702-0458 (Fax)
International Monetary Fund (IMF) ( email )
700 19th Street NW
Washington, DC 20431
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
773-702-9299 (Phone)
773-702-0458 (Fax)
Jeremy C. Stein (Contact Author)
Harvard University - Department of Economics ( email )
Littauer Center
Cambridge, MA 02138
United States
617-496-6455 (Phone)
617-496-7352 (Fax)
HOME PAGE: http://post.economics.harvard.edu/faculty/stein/stein.html
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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References:  34
Citations:  159
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