Federal Deposit InsuranceCorporation• Center for Financial Researchh
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper No. 2006-03
Managing Bank Liquidity Risk:
How Deposit-Loan Synergies Vary With Market Conditions
Söhnke M. Bartram
Gregory W. Brown
John E. Hund
July 2005D
December 2005
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper No. 2006-03
Managing Bank Liquidity Risk:
How Deposit-Loan Synergies Vary With Market Conditions
Söhnke M. Bartram
Gregory W. Brown
John E. Hund
July 2005D
December 2005
MANAGING BANK LIQUIDITY RISK:
HOW DEPOSIT-LOAN SYNERGIES VARY WITH MARKET CONDITIONS†
Evan Gatev
Boston College
Til Schuermann
Federal Reserve Bank of New York, Wharton Financial Institutions Center
Philip E. Strahan*
Boston College, Wharton Financial Institutions Center & NBER
December 2005
JEL Codes: G18; G21
Key Words: Liquidity; banking; financial crisis
Abstract
Unused loan commitments expose banks to systematic liquidity risk, but this exposure
can be reduced by combining loan commitments with transactions deposits. We show
that bank equity volatility increases with unused loan commitments, but this increase is
reduced for banks with high levels of transaction deposits. This deposit-lending synergy
becomes even more powerful during periods of tight liquidity, when nervous investors
move funds into their banks. Thus, the simultaneous taking of deposits and lending may
be thought of as a liquidity hedge.
† We would like to thank the FDIC Center for Financial Research for financial support, as well as for
helpful comments on the research. Kristin Wilson assisted with preparation of the data. Any views
expressed represent those of the authors only and not necessarily those of the Federal Reserve Bank of New
York or the Federal Reserve System.
* Corresponding author: Strahan is at Boston College, 140 Commonwealth Avenue, Chestnut Hill MA,
02467, Philip.strahan@bc.edu, 617-552-6430.
HOW DEPOSIT-LOAN SYNERGIES VARY WITH MARKET CONDITIONS†
Evan Gatev
Boston College
Til Schuermann
Federal Reserve Bank of New York, Wharton Financial Institutions Center
Philip E. Strahan*
Boston College, Wharton Financial Institutions Center & NBER
December 2005
JEL Codes: G18; G21
Key Words: Liquidity; banking; financial crisis
Abstract
Unused loan commitments expose banks to systematic liquidity risk, but this exposure
can be reduced by combining loan commitments with transactions deposits. We show
that bank equity volatility increases with unused loan commitments, but this increase is
reduced for banks with high levels of transaction deposits. This deposit-lending synergy
becomes even more powerful during periods of tight liquidity, when nervous investors
move funds into their banks. Thus, the simultaneous taking of deposits and lending may
be thought of as a liquidity hedge.
† We would like to thank the FDIC Center for Financial Research for financial support, as well as for
helpful comments on the research. Kristin Wilson assisted with preparation of the data. Any views
expressed represent those of the authors only and not necessarily those of the Federal Reserve Bank of New
York or the Federal Reserve System.
* Corresponding author: Strahan is at Boston College, 140 Commonwealth Avenue, Chestnut Hill MA,
02467, Philip.strahan@bc.edu, 617-552-6430.