Posted: 15 Nov 2003
What ties together the traditional commercial banking activities of deposit-taking and lending? We argue that since banks often lend via commitments, their lending and deposit-taking may be two manifestations of one primitive function: the provision of liquidity on demand. There will be synergies between the two activities to the extent that both require banks to hold large balances of liquid assets: If deposit withdrawals and commitment takedowns are imperfectly correlated, the two activities can share the costs of the liquid-asset stockpile. We develop this idea with a simple model, and use a variety of data to test the model empirically.
Suggested Citation: Suggested Citation
Kashyap, Anil K. and Rajan, Raghuram G. and Stein, Jeremy C., Banks as Liquidity Providers: An Explanation for the Coexistence of Lending and Deposit-Taking. Journal of Finance, Vol. 57, pp. 33-73, 2002. Available at SSRN: https://ssrn.com/abstract=309154