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Liquidity Production in 21st Century Banking

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  • Philip Strahan
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    Abstract

    I consider banks' role in providing funding liquidity (the ability to raise cash on demand) and market liquidity (the ability to trade assets at low cost), and how these roles have evolved. Traditional banks made illiquid loans funded with liquid deposits, thus producing funding liquidity on the liability side of the balance sheet. Deposits are less important in 21st century banks, but funding liquidity from lines of credit and loan commitments has become more important. Banks also provide market liquidity as broker-dealers and traders in securities and derivatives markets, in loan syndication and sales, and in loan securitization. Many institutions besides banks provide market liquidity in similar ways, but banks dominate in producing funding liquidity because of their comparative advantage in managing funding liquidity risk. This advantage stems from the structure of bank balance sheets as well as their access to government-guaranteed deposits and central-bank liquidity.

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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13798.

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    Date of creation: Feb 2008
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    Handle: RePEc:nbr:nberwo:13798

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    Cited by:
    1. Drehmann, Mathias & Nikolaou, Kleopatra, 2009. "Funding liquidity risk: definition and measurement," Working Paper Series 1024, European Central Bank.
    2. Sonia Ondo-Ndong & Laurence Scialom, 2008. "Northern Rock: The anatomy of a crisis – the prudential lessons," EconomiX Working Papers 2008-23, University of Paris West - Nanterre la Défense, EconomiX.
    3. G. Chiesa, 2014. "Safe Assets’ Scarcity, Liquidity and Spreads," Working Papers wp927, Dipartimento Scienze Economiche, Universita' di Bologna.
    4. Memmel, Christoph & Schertler, Andrea, 2009. "The dependency of the banks' assets and liabilities: evidence from Germany," Discussion Paper Series 2: Banking and Financial Studies 2009,14, Deutsche Bundesbank, Research Centre.

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