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Are Banks Liquidity Transformers?

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Author Info
Deep, Akash (Harvard U)
Schaefer, Guido (Vienna U of Economics and Business Administration)
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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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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  1. Allen N. Berger & Christa H.S. Bouwman, 2005. "Bank liquidity creation and bank capital," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 223-228. [Downloadable!]
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