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

38 Pages Posted: 25 May 2006 Last revised: 27 Jul 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: May 2006

Abstract

Liquidity risk in banking has been attributed to transactions deposits and their potential to spark runs or panics. We show instead that transactions deposits help banks hedge liquidity risk from unused loan commitments. Bank stock-return volatility increases with unused commitments, but the increase is smaller for banks with high levels of transactions deposits. This deposit-lending risk management synergy becomes more powerful during periods of tight liquidity, when nervous investors move funds into their banks. Our results reverse the standard notion of liquidity risk at banks, where runs from depositors had been seen as the cause of trouble.

Suggested Citation

Gatev, Evan and Strahan, Philip E. and Schuermann, Til, Managing Bank Liquidity Risk: How Deposit-Loan Synergies Vary with Market Conditions (May 2006). NBER Working Paper No. w12234. Available at SSRN: https://ssrn.com/abstract=902586

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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