Managing Bank Liquidity Risk: How Deposit-Loan Synergies Vary with Market Conditions

FDIC CRF Working Paper 2006-03

AFA 2007 Chicago Meetings Paper

35 Pages Posted: 17 Feb 2006

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

Multiple version iconThere are 3 versions of this paper

Date Written: December 2005

Abstract

Unused loan commitments expose banks to systematic liquidity risk, but this exposure can be reduced by combining loan commitments with transactions deposits. We show that bank equity volatility increases with unused loan commitments, but this increase is reduced for banks with high levels of transaction deposits. This deposit-lending synergy becomes even more powerful during periods of tight liquidity, when nervous investors move funds into their banks. Thus, the simultaneous taking of deposits and lending may be thought of as a liquidity hedge.

Keywords: Liquidity, banking, financial crisis

JEL Classification: G18, G21

Suggested Citation

Gatev, Evan and Strahan, Philip E. and Schuermann, Til, Managing Bank Liquidity Risk: How Deposit-Loan Synergies Vary with Market Conditions (December 2005). FDIC CRF Working Paper 2006-03; AFA 2007 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=882087 or http://dx.doi.org/10.2139/ssrn.882087

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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