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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/31364
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| Title: | Are Banks Passive Liquidity Backstops? |
| Authors: | Acharya, Viral V.
Mora, Nada |
| Issue Date: | 13-Dec-2011 |
| Series/Report no.: | FIN-11-031 |
| Abstract: | Can banks maintain their advantage as liquidity providers when they are
heavily exposed to a financial crisis? The standard argument - that
banks can - hinges on deposit inflows that are seeking a safe haven and
provide banks with a natural hedge to fund drawn credit lines and other
commitments. We shed new light on this issue by studying the behavior of
bank deposit rates and inflows during the 2007-09 crisis. Our results
indicate that the role of the banking system as a stabilizing liquidity
insurer is not one of the passive recipient, but of an active seeker, of
deposits. We find that banks facing a funding squeeze sought to attract
deposits by offering higher rates. Banks offering higher rates were also
those most exposed to liquidity demand shocks (as measured by their
unused commitments, wholesale funding dependence, and limited liquid
assets), as well as with fundamentally weak balance-sheets (as measured
by their non-performing loans or by subsequent failure). Such rate
increases have a competitive effect in that they lead other banks to
offer higher rates as well. Overall, the results present a nuanced view
of deposit rates and flows to banks in a crisis, one that reflects banks
not just as safety havens but also as stressed entities scrambling for deposits. |
| URI: | http://hdl.handle.net/2451/31364 |
| Appears in Collections: | Finance Working Papers
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