Managing Bank Liquidity Risk: How Deposit-Loan Synergies Vary with Market Conditions
Simon Fraser University
Philip E. Strahan
Boston College - Department of Finance; National Bureau of Economic Research (NBER)
FDIC CRF Working Paper 2006-03
AFA 2007 Chicago Meetings Paper
Unused loan commitments expose banks to systematic liquidity risk, but this exposure can be reduced by combining loan commitments with transactions deposits. We show that bank equity volatility increases with unused loan commitments, but this increase is reduced for banks with high levels of transaction deposits. This deposit-lending synergy becomes even more powerful during periods of tight liquidity, when nervous investors move funds into their banks. Thus, the simultaneous taking of deposits and lending may be thought of as a liquidity hedge.
Number of Pages in PDF File: 35
Keywords: Liquidity, banking, financial crisis
JEL Classification: G18, G21working papers series
Date posted: February 17, 2006
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