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Liquidity holdings, diversification, and aggregate shocks

Author

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  • Chavaz, Matthieu

    (Bank of England)

Abstract

This paper shows that US banks’ increased geographic diversification is an important explanation for the decline of their liquidity buffers from 1976 to the 2008 crisis. Diversified banks also hold more illiquid small business loans, less liquid mortgages, and have higher net liquidity creation. During the crisis, however, better diversified banks hoard more liquidity. These results suggest that diversification increases liquidity risk-taking capacity in normal times, and that exploiting this advantage leaves banks more exposed to aggregate shocks.

Suggested Citation

  • Chavaz, Matthieu, 2017. "Liquidity holdings, diversification, and aggregate shocks," Bank of England working papers 698, Bank of England.
    • Handle: RePEc:boe:boeewp:0698
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    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2017/liquidity-holdings-diversification-and-aggregate-shocks.pdf?la=en&hash=AE6810232D82B2831183B54027C177982568D319
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    Citations

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    Cited by:

    1. Ren, Meixu & Zhao, Jingmei & Ke, Konglin & Li, Yidong, 2023. "Bank homogeneity and risk-taking: Evidence from China," The Quarterly Review of Economics and Finance, Elsevier, vol. 92(C), pages 142-154.
    2. Schüwer, Ulrich & Gropp, Reint E. & Noth, Felix, 2016. "What drives banks' geographic expansion? The role of locally non-diversifiable risk," VfS Annual Conference 2016 (Augsburg): Demographic Change 145885, Verein für Socialpolitik / German Economic Association.
    3. Giovanni Calice & Yong Kyu Gam, 2023. "US National Banks and Local Economic Fragility," Journal of Financial Services Research, Springer;Western Finance Association, vol. 63(3), pages 313-338, June.
    4. Choi, Seungho & Gam, Yong Kyu & Park, Junho & Shin, Hojong, 2020. "Bank partnership and liquidity crisis," Journal of Banking & Finance, Elsevier, vol. 120(C).

    More about this item

    Keywords

    Liquidity; diversification; crises; regulation;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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