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

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  • Evan Gatev
  • Til Schuermann
  • Philip E. Strahan

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. 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, Oxford University Press.

Suggested Citation

  • Evan Gatev & Til Schuermann & Philip E. Strahan, 2009. "Managing Bank Liquidity Risk: How Deposit-Loan Synergies Vary with Market Conditions," The Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 995-1020, March.
    • Handle: RePEc:oup:rfinst:v:22:y:2009:i:3:p:995-1020
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    File URL: http://hdl.handle.net/10.1093/rfs/hhm060
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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