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Are Banks Liquidity Transformers?

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  • Deep, Akash

    (Harvard U)

  • Schaefer, Guido

    (Vienna U of Economics and Business Administration)

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    Abstract

    Although much of banking theory and regulation is based on banks modeled as fragile liquidity transformers, this view does not appear to have solid empirical foundation. We show that the amount of liquidity transformation measured as the scaled difference between liquid liabilities and assets performed by US commercial banks is surprisingly low. Deposit insurance has limited success in promoting liquidity transformation because insured deposits mostly replace uninsured liabilities rather than expand the deposit base or loans. Instead, it is the credit risk in loan portfolios that appears to discourage liquidity transformation.

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    Bibliographic Info

    Paper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp04-022.

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    Date of creation: May 2004
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    Handle: RePEc:ecl:harjfk:rwp04-022

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    Cited by:
    1. Lei, Adrian C.H. & Song, Zhuoyun, 2013. "Liquidity creation and bank capital structure in China," Global Finance Journal, Elsevier, vol. 24(3), pages 188-202.
    2. Stanhouse, Bryan & Schwarzkopf, Al & Ingram, Matt, 2011. "A computational approach to pricing a bank credit line," Journal of Banking & Finance, Elsevier, vol. 35(6), pages 1341-1351, June.
    3. Isabelle Distinguin & Caroline Roulet & Amine Tarazi, 2012. "Bank regulatory Capital Buffer and Liquidity: Evidence from US and European Publicly Traded Banks," Working Papers hal-00918468, HAL.
    4. Leo de Haan & Jan Willem van den End, 2012. "Bank liquidity, the maturity ladder, and regulation," DNB Working Papers 346, Netherlands Central Bank, Research Department.
    5. Distinguin, Isabelle & Roulet, Caroline & Tarazi, Amine, 2013. "Bank regulatory capital and liquidity: Evidence from US and European publicly traded banks," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3295-3317.

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