Canary in the Coal Mine: Bank Liquidity Shortages and Local Economic Activity

83 Pages Posted: 19 Oct 2022 Last revised: 13 Feb 2024

See all articles by Rajkamal Iyer

Rajkamal Iyer

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Shohini Kundu

University of California, Los Angeles (UCLA) - Anderson School of Management; Centre for Economic Policy Research (CEPR)

Nikos Paltalidis

Durham University Business School

Date Written: October 14, 2022

Abstract

This paper proposes a novel measure for assessing the build-up of economic risks at the regional level using spatial variation in bank liquidity. We find that an increase in deposit rates offered by banks within a region is associated with contractions in economic activity. At the onset of a downturn, deposit growth slows down, prompting banks to increase deposit rates to support their balance sheet. This increase in deposit rates reflects the liquidity squeeze experienced by banks, which in turn serves as an indicator of an impending economic contraction. Deposit rates, being forward-looking, have better predictive power than other variables.

JEL Classification: R11, G21, E32

Suggested Citation

Iyer, Rajkamal and Kundu, Shohini and Paltalidis, Nikos, Canary in the Coal Mine: Bank Liquidity Shortages and Local Economic Activity (October 14, 2022). Available at SSRN: https://ssrn.com/abstract=4247519 or http://dx.doi.org/10.2139/ssrn.4247519

Rajkamal Iyer

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Shohini Kundu (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Nikos Paltalidis

Durham University Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

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