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Liquidity risk management and credit supply in the financial crisis

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Author Info

  • Cornett, Marcia Millon
  • McNutt, Jamie John
  • Strahan, Philip E.
  • Tehranian, Hassan
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    Abstract

    Liquidity dried up during the financial crisis of 2007-2009. Banks that relied more heavily on core deposit and equity capital financing, which are stable sources of financing, continued to lend relative to other banks. Banks that held more illiquid assets on their balance sheets, in contrast, increased asset liquidity and reduced lending. Off-balance sheet liquidity risk materialized on the balance sheet and constrained new credit origination as increased takedown demand displaced lending capacity. We conclude that efforts to manage the liquidity crisis by banks led to a decline in credit supply.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 101 (2011)
    Issue (Month): 2 (August)
    Pages: 297-312

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    Handle: RePEc:eee:jfinec:v:101:y:2011:i:2:p:297-312

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Financial institutions Liquidity risk Financial crisis;

    References

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