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Banks' Advantage in Hedging Liquidity Risk: Theory and Evidence from the Commercial Paper Market

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  • EVAN GATEV
  • PHILIP E. STRAHAN
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    Abstract

    Banks have a unique ability to hedge against market-wide liquidity shocks. Deposit inflows provide funding for loan demand shocks that follow declines in market liquidity. Consequently, banks can insure firms against systematic declines in liquidity at lower cost than other institutions. We provide evidence that when liquidity dries up and commercial paper spreads widen, banks experience funding inflows. These flows allow banks to meet loan demand from borrowers drawing funds from commercial paper backup lines without running down their holdings of liquid assets. We also provide evidence that implicit government support for banks during crises explains these funding flows. Copyright 2006 by The American Finance Association.

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    Bibliographic Info

    Article provided by American Finance Association in its journal The Journal of Finance.

    Volume (Year): 61 (2006)
    Issue (Month): 2 (04)
    Pages: 867-892
    Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
    Handle: RePEc:bla:jfinan:v:61:y:2006:i:2:p:867-892

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    Cited by:
    1. Ricardo J. Caballero & Arvind Krishnamurthy, 2007. "Collective Risk Management in a Flight to Quality Episode," NBER Working Papers 12896, National Bureau of Economic Research, Inc.
    2. Gabriel Jiménez & José A. López & Jesús Saurina, 2008. "Empirical analysis of corporate credit lines," Banco de España Working Papers 0821, Banco de España.
    3. Philip Strahan, 2008. "Liquidity Production in 21st Century Banking," NBER Working Papers 13798, National Bureau of Economic Research, Inc.
    4. Thierfelder, Felix, 2008. "Rollover risk in commercial paper markets and firms' debt maturity choice," Discussion Paper Series 2: Banking and Financial Studies 2008,05, Deutsche Bundesbank, Research Centre.
    5. Evan Gatev & Philip Strahan, 2008. "Liquidity Risk and Syndicate Structure," NBER Working Papers 13802, National Bureau of Economic Research, Inc.
    6. Arthur Hau, 2011. "Pricing of Loan Commitments for Facilitating Stochastic Liquidity Needs," Journal of Financial Services Research, Springer, vol. 39(1), pages 71-94, April.
    7. Evan Gatev & Til Schuermann & Philip E. Strahan, 2006. "Managing Bank Liquidity Risk: How Deposit-Loan Synergies Vary with Market Conditions," NBER Working Papers 12234, National Bureau of Economic Research, Inc.
    8. Bag, Pinaki, 2010. "Exposure at Default Model for Contingent Credit Line," MPRA Paper 20387, University Library of Munich, Germany.
    9. Til Schuermann & Kevin J. Stiroh, 2006. "Visible and hidden risk factors for banks," Staff Reports 252, Federal Reserve Bank of New York.
    10. Degryse, Hans & Elahi, Muhammad Ather & Penas, Maria Fabiana, 2012. "Determinants of Banking System Fragility: A Regional Perspective," CEPR Discussion Papers 8858, C.E.P.R. Discussion Papers.
    11. Nikolov, Pavel, 2010. "Procyclical Effects of the banking System during the financial and economic Crisis 2007-2009: the Case of Europe," MPRA Paper 24126, University Library of Munich, Germany, revised 27 Jul 2010.
    12. Nikolov, Pavel, 2010. "Procyclical Effects of the banking System during the financial and economic Crisis 2007-2009: the Case of Europe," MPRA Paper 23945, University Library of Munich, Germany.
    13. Ethan Cohen-Cole & Burcu Duygan-Bump & José Fillat & Judit Montoriol-Garriga, 2008. "Looking behind the aggregates: a reply to “Facts and Myths about the Financial Crisis of 2008”," Quantitative Analysis Unit Working Paper QAU08-5, Federal Reserve Bank of Boston.
    14. Arvind Krishnamurthy, 2009. "Amplification Mechanisms in Liquidity Crises," NBER Working Papers 15040, National Bureau of Economic Research, Inc.
    15. Kleopatra Nikolaou, 2009. "Liquidity (risk) concepts - definitions and interactions," Working Paper Series 1008, European Central Bank.
    16. Massimo Massa & Ayako Yasuda & Lei Zhang, 2008. "Institutional investors, credit supply uncertainty, and the leverage of the firm," Proceedings, Federal Reserve Bank of Chicago.

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