A Crisis of Banks as Liquidity Providers

78 Pages Posted: 15 Dec 2011 Last revised: 15 Oct 2013

See all articles by Viral V. Acharya

Viral V. Acharya

New York University - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Nada Mora

Lebanese University

Multiple version iconThere are 4 versions of this paper

Date Written: October 14, 2013

Abstract

Can banks maintain their advantage as liquidity providers when exposed to a financial crisis? While banks honored their credit lines drawn by firms during the 2007-09 crisis, this provision of liquidity by banks was only possible because of explicit, large support from the government and government-sponsored agencies. At the onset of the crisis, aggregate deposit inflows into banks weakened and their loan-to-deposit shortfalls widened. These patterns were pronounced at banks exposed to greater undrawn commitments. Such banks sought to attract deposits by offering higher rates, but the resulting private funding was insufficient to cover loan-to-deposit shortfalls and they reduced new credit.

Keywords: Liquidity risk, Solvency risk, Financial crisis, Flight to safety

JEL Classification: E4, G01, G11, G21, G28

Suggested Citation

Acharya, Viral V. and Mora, Nada, A Crisis of Banks as Liquidity Providers (October 14, 2013). Journal of Finance, Forthcoming, NYU Working Paper No. FIN-11-031, Available at SSRN: https://ssrn.com/abstract=1972802

Viral V. Acharya (Contact Author)

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Nada Mora

Lebanese University ( email )

14 Badaro, Museum
P.O. Box 6573
Beirut, 6056
Lebanon

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