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Banks as Liquidity Multipliers

Author

Listed:
  • Sylvain Carré
  • Damien Klossner

Abstract

We characterize the interaction between banks’ liquid assets purchases and deposit issuance decisions. Using global games, we derive a liquidity multiplier: the amount of deposits a bank can create when endowed with one additional unit of liquid asset to maintain a given level of liquidity risk. In our central theorem, we prove it is larger than unity. This entails that banks have a special role in enhancing liquidity provision, “multiplying” liquid assets into a larger quantity of deposits. Our theory has implications for banks’ balance sheet choices, the pricing of liquid securities, and the role of public liquidity provision.

Suggested Citation

  • Sylvain Carré & Damien Klossner, 2024. "Banks as Liquidity Multipliers," The Review of Financial Studies, Society for Financial Studies, vol. 37(1), pages 265-307.
    • Handle: RePEc:oup:rfinst:v:37:y:2024:i:1:p:265-307.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhad053
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    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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