Liquidity Transformation and Fragility in the US Banking Sector
Journal of Finance, forthcoming
88 Pages Posted: 25 Feb 2021 Last revised: 9 Jan 2024
There are 2 versions of this paper
Liquidity Transformation and Fragility in the US Banking Sector
Liquidity Transformation and Fragility in the Us Banking Sector
Date Written: October 2, 2023
Abstract
A key role 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 much theoretical work, there has not been much empirical evidence establishing this mechanism. In this paper, we provide the first large-scale evidence of this mechanism. Banks that perform more liquidity transformation exhibit higher fragility, manifested by stronger sensitivities 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.
Keywords: Liquidity transformation, Bank runs, Strategic complementarity
JEL Classification: G21, M40
Suggested Citation: Suggested Citation