IDEAS home Printed from https://ideas.repec.org/p/boc/bocoec/446.html
   My bibliography  Save this paper

Liquid Assets in Banks: Theory and Practice

Author

Listed:
  • Guillermo Alger

    (Analysis Group Economics)

  • Ingela Alger

    () (Boston College)

Abstract

This paper summarizes theoretical findings on the determinants of liquid assets held by banks. The findings are summarized in a series of predictions, some of which are tested using a panel data set on Mexican banks. Surprisingly, we find that banks with relatively more demand deposits have relatively less liquid assets, in contrast with the theoretical prediction. We further exploit a period characterized by a prolonged aggregate liquidity shock on the Mexican banking system to shed light on the question: are there banks that rely more than others on liquid assets to meet their liquidity needs? We find that only small banks seem to rely on liquid assets to meet severe liquidity shocks.

Suggested Citation

  • Guillermo Alger & Ingela Alger, 1999. "Liquid Assets in Banks: Theory and Practice," Boston College Working Papers in Economics 446, Boston College Department of Economics.
    • Handle: RePEc:boc:bocoec:446
    as

    Download full text from publisher

    File URL: http://fmwww.bc.edu/EC-P/wp446.pdf
    File Function: main text
    Download Restriction: no

    References listed on IDEAS

    as
    1. Pyle, David H, 1971. "On the Theory of Financial Intermediation," Journal of Finance, American Finance Association, vol. 26(3), pages 737-747, June.
    2. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February.
    3. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    4. Jean-Charles Rochet & Jean Tirole, 1996. "Interbank lending and systemic risk," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 733-765.
    5. Deborah J. Lucas & Robert L. McDonald, 1992. "Bank Financing and Investment Decisions with Asymmetric Information about Loan Quality," RAND Journal of Economics, The RAND Corporation, vol. 23(1), pages 86-105, Spring.
    6. Anil K. Kashyap & Raghuram Rajan & Jeremy C. Stein, 2002. "Banks as Liquidity Providers: An Explanation for the Coexistence of Lending and Deposit-Taking," Journal of Finance, American Finance Association, vol. 57(1), pages 33-73, February.
    7. Jeremy C. Stein & Anil K. Kashyap, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, vol. 90(3), pages 407-428, June.
    8. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    9. Bester,Helmut Hellwig,Martin, 1987. "Moral hazard and equilibrium credit rationing: An overview of the issues," Discussion Paper Serie A 125, University of Bonn, Germany.
    10. Merton, Robert C., 1977. "An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 3-11, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hassan Belkacem GHASSAN, 2017. "New alternative measuring financial stability," Turkish Economic Review, KSP Journals, vol. 4(3), pages 275-281, September.
    2. Guy, Kester & Lowe, Shane, 2012. "Tracing the Liquidity Effects on Bank Stability in Barbados," MPRA Paper 52205, University Library of Munich, Germany.
    3. Chen, Minghua & Wu, Ji & Jeon, Bang Nam & Wang, Rui, 2017. "Do foreign banks take more risk? Evidence from emerging economies," Journal of Banking & Finance, Elsevier, vol. 82(C), pages 20-39.
    4. Martin Gonzalez Eiras, 2003. "Bank's Liquidity Demand in the Presence of a Lender of Last Resort," Working Papers 61, Universidad de San Andres, Departamento de Economia, revised Sep 2003.
    5. Anderson-Reid, Karen, 2011. "Excess reserves in Jamaican Commercial Banks: The implications for Monetary Policy," MPRA Paper 43663, University Library of Munich, Germany.
    6. Wu, Ji & Chen, Minghua & Jeon, Bang Nam & Wang, Rui, 2017. "Does foreign bank penetration affect the risk of domestic banks? Evidence from emerging economies," Journal of Financial Stability, Elsevier, vol. 31(C), pages 45-61.

    More about this item

    Keywords

    liquid assets; banks; liquidity shocks;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:boc:bocoec:446. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F Baum). General contact details of provider: http://edirc.repec.org/data/debocus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.