Minimizing bank liquidity risk: evidence from the Lehman crisis

We propose a new framework for Asset-Liability Management of bank liquidity risk. We consider liquidity-risk diversification across asset and liability classes of US commercial banks and provide evidence of banks’ heterogeneous response to the Lehman crisis. Empirical results indicate that since the onset of the global financial crisis, small banks relied extensively on securities holdings to meet their liquidity needs and undo the ensuing tightening in funding conditions. During the deleveraging process that followed, large banks appeared relatively unconstrained by loan illiquidity and were able to scale down loan exposures more aggressively than smaller banks. Non- transaction deposits played a key role in boosting funding liquidity of larger banks during the Lehman crisis. In contrast, transaction deposits supported the funding position of small banks only after the crisis. Copyright Eurasia Business and Economics Society 2015