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Bank Liquidity Hoarding and the Financial Crisis: An Empirical Evaluation

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  • Jose M. Berrospide

    (Federal Reserve Board, USA)

Abstract

I test and find supporting evidence for the precautionary motive hypothesis of liquidity hoarding for U.S. commercial banks during the global financial crisis. I find that banks held more liquid assets in anticipation of future losses from securities write-downs. Exposure to securities losses in their investment portfolios and expected loan losses (measured by loan loss reserves) represent key measures of banks’ on-balance sheet risks, in addition to off-balance sheet liquidity risk stemming from unused loan commitments. Furthermore, unrealized securities losses and loan loss reserves seem to better capture the risks stemming from banks’ asset management and provide supporting evidence for the precautionary nature of liquidity hoarding. Moreover, I find that more than one-fourth of the reduction in bank lending during the crisis is due to the precautionary motive.

Suggested Citation

  • Jose M. Berrospide, 2021. "Bank Liquidity Hoarding and the Financial Crisis: An Empirical Evaluation," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 11(04), pages 1-35, December.
    • Handle: RePEc:wsi:qjfxxx:v:11:y:2021:i:04:n:s2010139221500208
    DOI: 10.1142/S2010139221500208
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    Cited by:

    1. Ling, Aifan & Huang, Xinrui & Ling, Boya (Vivye), 2022. "Fund immunity to the COVID-19 pandemic: Evidence from Chinese equity funds," The North American Journal of Economics and Finance, Elsevier, vol. 63(C).
    2. Thomas B. King & Travis D. Nesmith & Anna Paulson & Todd Prono, 2023. "Central Clearing and Systemic Liquidity Risk," International Journal of Central Banking, International Journal of Central Banking, vol. 19(4), pages 85-142, October.
    3. Xuanling MA & Meng JI, 2023. "Analysis on Liquidity Risk Management of Monetary and Financial Services based on the Goal of Financial Stability," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 72-91, June.
    4. Arias, Jose & Talavera, Oleksandr & Tsapin, Andriy, 2022. "Bank liquidity and exposure to industry shocks: Evidence from Ukraine," Emerging Markets Review, Elsevier, vol. 53(C).
    5. Tran, Dung Viet & Bui, Dien Giau & Nguyen, Cuong & Hoang, Huy Viet, 2023. "Bank liquidity hoarding during the COVID-19 pandemic," Finance Research Letters, Elsevier, vol. 55(PB).

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