Liquidity Transformation and Fragility in the Us Banking Sector

70 Pages Posted: 14 Sep 2020 Last revised: 7 Nov 2022

See all articles by Qi Chen

Qi Chen

Duke University - Fuqua School of Business

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department ; National Bureau of Economic Research (NBER)

Zeqiong Huang

Yale School of Management

Rahul Vashishtha

Duke University

Multiple version iconThere are 2 versions of this paper

Date Written: September 2020

Abstract

One of the key roles of banks is liquidity transformation, which is also thought to create fragility, as uninsured depositors face an incentive to withdraw money before others (a so-called panic run). Despite large amount of theoretical work, there has not been much empirical evidence establishing this mechanism. In this paper, we provide the first large-scale evidence on this mechanism. Banks that perform more liquidity transformation exhibit higher fragility, manifested by stronger sensitivity of uninsured deposit flows to bank performance and greater levels of uninsured deposit outflows when performance is poor. We also explore the effects of deposit insurance and systemic risk.

Suggested Citation

Chen, Qi and Goldstein, Itay and Huang, Zeqiong and Vashishtha, Rahul, Liquidity Transformation and Fragility in the Us Banking Sector (September 2020). NBER Working Paper No. w27815, Available at SSRN: https://ssrn.com/abstract=3692171

Qi Chen (Contact Author)

Duke University - Fuqua School of Business ( email )

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Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department ( email )

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National Bureau of Economic Research (NBER) ( email )

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Zeqiong Huang

Yale School of Management ( email )

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Rahul Vashishtha

Duke University ( email )

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91-660-7971 (Fax)

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