Are Banks Liquidity Transformers?

55 Pages Posted: 14 Jun 2004

See all articles by Akash Deep

Akash Deep

Harvard University - Harvard Kennedy School (HKS)

Guido K. Schaefer

Vienna University of Economics & Business Administration - Department of Economics

Date Written: May 2004

Abstract

Although much of banking theory and regulation is based on banks modeled as fragile liquidity transformers, this view does not appear to have solid empirical foundation. We show that the amount of liquidity transformation - measured as the scaled difference between liquid liabilities and assets - performed by US commercial banks is surprisingly low. Deposit insurance has limited success in promoting liquidity transformation because insured deposits mostly replace uninsured liabilities rather than expand the deposit base or loans. Instead, it is the credit risk in loan portfolios that appears to discourage liquidity transformation.

JEL Classification: G21, G28

Suggested Citation

Deep, Akash and Schaefer, Guido K., Are Banks Liquidity Transformers? (May 2004). KSG Working Paper No. RWP04-022, Available at SSRN: https://ssrn.com/abstract=556289 or http://dx.doi.org/10.2139/ssrn.556289

Akash Deep (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-495-1340 (Phone)
617-496-6372 (Fax)

Guido K. Schaefer

Vienna University of Economics & Business Administration - Department of Economics ( email )

Augasse 2-6
A-1090 Wien
Austria
+43 1 313 36 4579 (Phone)

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