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RFS Advance Access originally published online on November 20, 2007
Review of Financial Studies 2009 22(3):995-1020; doi:10.1093/rfs/hhm060
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© The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

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

Evan Gatev
Boston College

Til Schuermann
Federal Reserve Bank of New York and Wharton Financial Institutions Center

Philip E. Strahan
Boston College, Wharton Financial Institutions Center, and National Bureau of Economic Research

Address correspondence to P. E. Strahan, Boston College, 140 Commonwealth Avenue, Chestnut Hill, MA 02467, United States; telephone: (617) 552-6430; or e-mail: philip.strahan{at}bc.edu.

JEL Classification: G18, G21


  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 only for banks with low levels of transactions deposits. This deposit-lending hedge 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.

We would like to thank the FDIC Center for Financial Research for financial support, as well as for helpful comments on the research. We would also like to thank seminar participants at Boston College, Ohio University, Tilburg University, and the University of Amsterdam, and participants at the 2nd FIRS (Financial Intermediation Research Society) Conference in Shanghai and the China International Conference in Finance (CICF) in Xian, as well as Robert de Young, Paul Kupiec, Tobias Moskowitz (the editor), and an anonymous referee. Kristin Wilson assisted with preparation of the data. Any views expressed represent those of the authors only and not necessarily those of the Federal Reserve Bank of New York or the Federal Reserve System.


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