Combining Deposit Taking with Credit Line Provision and the Risk of Concurrent Runs by Depositors and Firms

47 Pages Posted: 12 Dec 2012

Date Written: December 11, 2012

Abstract

Combining deposit taking with credit line provision saves on the liquidity costs banks incur to meet the liquidity needs of consumers and corporations, but it exposes them to a risk of concurrent runs on their assets and liabilities. If a bank’s financial condition deteriorates, depositors have an incentive to withdraw their funds, and corporations will find it advantageous to accelerate the draw downs on their credit lines. We test this hypothesis of concurrent runs on banks’ assets and liabilities by investigating how US uninsured depositors and corporations with outstanding credit lines reacted over the last two decades to a deterioration in the performance of their bank. We find that during recessions, in particular the recent subprime crisis, banks that suffered larger losses experience both a run by their uninsured depositors and an increase in the draw downs on the credit lines they had outstanding to corporations. These findings, which are robust to borrower-, bank-, and credit-line-specific controls as well as bank-fixed effects, show that banks’ provision of liquidity on demand to depositors and corporations exposes them to a risk of a concurrent run on their assets and liabilities. This finding is important because concurrent runs pose significant liquidity risks to banks.

Keywords: bank deposits withdrawals, credit lines draw downs, liquidity risk

JEL Classification: G21, G28, E53

Suggested Citation

Santos, João A. C., Combining Deposit Taking with Credit Line Provision and the Risk of Concurrent Runs by Depositors and Firms (December 11, 2012). Available at SSRN: https://ssrn.com/abstract=2187993 or http://dx.doi.org/10.2139/ssrn.2187993

João A. C. Santos (Contact Author)

Federal Reserve Bank of New York ( email )

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New York, NY 10045
United States
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212-720-8363 (Fax)

HOME PAGE: HTTP://WWW.NEWYORKFED.ORG/RMAGHOME/ECONOMIST/SANTOS/CONTACT.HTML

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