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Hedging bank liquidity risk

Author

Listed:
  • Evan Gatev
  • Til Schuermann
  • Philip E. Strahan

Abstract

Liquidity risk in banking has been attributed to transactions deposits and their potential to spark runs or panics. We show instead that transactions deposits help banks hedge liquidity risk from unused loan commitments. Bank stock-return volatility increases with unused commitments, but the increase is smaller for banks with high levels of transactions deposits. This deposit-lending risk management synergy becomes more powerful during periods of tight liquidity, when nervous investors move funds into their banks. Our results reverse the standard notion of liquidity risk at banks, where runs from depositors had been seen as the cause of trouble.

Suggested Citation

  • Evan Gatev & Til Schuermann & Philip E. Strahan, 2006. "Hedging bank liquidity risk," Proceedings 1024, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhpr:1024
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    Keywords

    Hedging (Finance); Liquidity (Economics);

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