We report evidence from the equity market that unused loan commitments expose banks to systematic liquidity risk, especially during crises such as the one observed in the fall of 1998. We also find, however, that banks with higher levels of transactions deposits had lower risk during the 1998 crisis than other banks. These banks experienced large inflows of funds just as they were needed -- when liquidity demanded by firms taking down funds from commercial paper backup lines of credit peaked. Our evidence suggests that combining loan commitments with deposits mitigates liquidity risk, and that this deposit-lending synergy is especially powerful during period of crises as nervous investors move funds into their banks.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
10982.
Length: Date of creation: Dec 2004 Date of revision: Publication status: published relationship to a non-chapter. This should not happen. Please contact NBER. Handle: RePEc:nbr:nberwo:10982
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Find related papers by JEL classification: G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Stewart C. Myers & Raghuram G. Rajan, 1998.
"The Paradox of Liquidity,"
CRSP working papers
339, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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