Why Are Banks' Holdings of Liquid Assets So High?

Fisher College of Business Working Paper No. 2023-03-009

Charles A Dice Working Paper No. 2023-9

60 Pages Posted: 5 May 2023 Last revised: 7 Mar 2024

See all articles by René M. Stulz

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Alvaro G. Taboada

Mississippi State University

Mathijs A. van Dijk

Erasmus University Rotterdam (EUR)

Date Written: March 4, 2024

Abstract

Banks hold large amounts of liquid assets compared to non-financial firms and to before the global financial crisis (GFC). The transaction and precautionary motives for holding liquid assets cannot explain the size and evolution of bank liquid asset holdings. We introduce a portfolio motive that leads banks to invest in liquid assets when they have exhausted their ability to make profitable loans. With this motive, loans and liquid assets are substitutes. Post-GFC capital requirement increases lowered the profitability of loans relative to liquid assets and help explain why liquid asset holdings are larger and more so for large banks.

Keywords: banks, liquid assets, reserves, loans, LCR, capital requirements

JEL Classification: G21, G28

Suggested Citation

Stulz, Rene M. and Taboada, Alvaro G. and van Dijk, Mathijs A., Why Are Banks' Holdings of Liquid Assets So High? (March 4, 2024). Fisher College of Business Working Paper No. 2023-03-009, Charles A Dice Working Paper No. 2023-9, Available at SSRN: https://ssrn.com/abstract=4438592 or http://dx.doi.org/10.2139/ssrn.4438592

Rene M. Stulz (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Alvaro G. Taboada

Mississippi State University ( email )

310-H McCool Hall
PO Box 9580
Mississippi State, MS 39762
United States
662-325-6716 (Phone)
662-325-1977 (Fax)

Mathijs A. Van Dijk

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

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