Managing Bank Liquidity Risk: How Deposit-Loan Synergies Vary with Market Conditions

Posted: 17 Mar 2009

See all articles by Evan Gatev

Evan Gatev

Simon Fraser University

Til Schuermann

Oliver Wyman

Philip E. Strahan

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: March 2009

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 only for banks with low levels of transactions deposits. This deposit-lending hedge 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: G18, G21

Suggested Citation

Gatev, Evan and Schuermann, Til and Strahan, Philip E., Managing Bank Liquidity Risk: How Deposit-Loan Synergies Vary with Market Conditions (March 2009). The Review of Financial Studies, Vol. 22, Issue 3, pp. 995-1020, 2009. Available at SSRN: https://ssrn.com/abstract=1359518 or http://dx.doi.org/hhm060

Evan Gatev (Contact Author)

Simon Fraser University ( email )

Burnaby, British Columbia V5A 1S6
Canada

Til Schuermann

Oliver Wyman ( email )

1166 6th Avenue
New York City, NY
United States

Philip E. Strahan

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
617-552-6430 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://www2.bc.edu/~strahan

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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