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Why Are Bank Holdings of Liquid Assets So High?

Author

Listed:
  • Stulz, Rene M.

    (Ohio State U)

  • Taboada, Alvaro G.

    (Mississippi State U)

  • van Dijk, Mathijs A.

    (Erasmus U Rotterdam)

Abstract

Aggregate bank liquid asset holdings (reserves and liquid securities) increased from 13% to 33% of assets from before the Global Financial Crisis (GFC) to 2020. If banks allocate their balance sheet by equalizing the marginal risk-adjusted expected return across asset classes, they hold more liquid assets when they have less advantageous lending opportunities. We show that, indeed, holdings of liquid assets are negatively related to lending opportunities. Our findings indicate that bank liquid asset holdings grew since the GFC because of weak lending opportunities, though regulatory changes help explain the higher liquid asset holdings of the largest banks before COVID.

Suggested Citation

  • Stulz, Rene M. & Taboada, Alvaro G. & van Dijk, Mathijs A., 2023. "Why Are Bank Holdings of Liquid Assets So High?," Working Paper Series 2023-09, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2023-09
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    More about this item

    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

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