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Banks as Liquidity Providers: An Explanation for the Coexistence of Lending and Deposit-Taking

  • Anil K. Kashyap

    (University of Chicago,)

  • Raghuram Rajan

    (University of Chicago,)

  • Jeremy C. Stein

    (Harvard University)

What ties together the traditional commercial banking activities of deposit-taking and lending? We argue that since banks often lend via commitments, their lending and deposit-taking may be two manifestations of one primitive function: the provision of liquidity on demand. There will be synergies between the two activities to the extent that both require banks to hold large balances of liquid assets: If deposit withdrawals and commitment takedowns are imperfectly correlated, the two activities can share the costs of the liquid-asset stockpile. We develop this idea with a simple model, and use a variety of data to test the model empirically. Copyright The American Finance Association 2002.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 57 (2002)
Issue (Month): 1 (02)
Pages: 33-73

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Handle: RePEc:bla:jfinan:v:57:y:2002:i:1:p:33-73
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