#06-09
Managing Bank Liquidity Risk: How Deposit Loan Synergies Vary with Market Conditions
Evan Gatev, Til Schuermann, Philip E. Strahan, April 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.
Keywords: Liquidity; banking; financial crisis
JEL classifications : G18; G21
