How Do Banks Manage Liquidity Risk? Evidence from Equity and Deposit Markets in the Fall of 1998

37 Pages Posted: 15 Dec 2004 Last revised: 6 Jul 2010

See all articles by Evan Gatev

Evan Gatev

Simon Fraser University

Philip E. Strahan

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Til Schuermann

Oliver Wyman

Date Written: December 2004

Abstract

We report evidence from the equity market that unused loan commitments expose banks to systematic liquidity risk, especially during crises such as the one observed in the fall of 1998. We also find, however, that banks with higher levels of transactions deposits had lower risk during the 1998 crisis than other banks. These banks experienced large inflows of funds just as they were needed -- when liquidity demanded by firms taking down funds from commercial paper backup lines of credit peaked. Our evidence suggests that combining loan commitments with deposits mitigates liquidity risk, and that this deposit-lending synergy is especially powerful during period of crises as nervous investors move funds into their banks.

Suggested Citation

Gatev, Evan and Strahan, Philip E. and Schuermann, Til, How Do Banks Manage Liquidity Risk? Evidence from Equity and Deposit Markets in the Fall of 1998 (December 2004). NBER Working Paper No. w10982. Available at SSRN: https://ssrn.com/abstract=635384

Evan Gatev

Simon Fraser University ( email )

Burnaby, British Columbia V5A 1S6
Canada

Philip E. Strahan (Contact Author)

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
617-552-6430 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://www2.bc.edu/~strahan

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Til Schuermann

Oliver Wyman ( email )

1166 6th Avenue
New York City, NY
United States

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