Bank Sentiment and Liquidity Hoarding

Abstract

We analyze how bank sentiment affects bank liquidity hoarding, distinguishing unexplained beliefs of bank managers from fundamental-based beliefs. We build a bank management sentiment measure from textual analysis of 10-Ks and utilize a comprehensive bank liquidity hoarding measure. We find that negative bank sentiment increases liquidity hoarding not warranted by a bank’s fundamental conditions or external circumstances. Further analysis confirms that our findings reflect bank volition rather than being driven solely by borrowers or depositors. We address endogeneity concerns using exogenous weather conditions as instruments. Overall, our findings suggest that bank sentiment can influence how much liquidity banks provide to the economy and financial system.

Keywords: bank sentiment, liquidity hoarding, textual analysis, bank disclosure

JEL Classification: G21, G02, D03