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Liquidity Production in 21st Century Banking

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  • Philip Strahan

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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  • Philip Strahan, 2008. "Liquidity Production in 21st Century Banking," NBER Working Papers 13798, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:13798
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    Cited by:

    1. Tomas Konecny & Oxana Babecka-Kucharcukova, 2016. "Credit Spreads and the Links between the Financial and Real Sectors in a Small Open Economy: The Case of the Czech Republic," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 66(4), pages 302-321, August.
    2. 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.
    3. Jean-Paul Pollin, 2009. "Réguler la liquidité bancaire," Revue d'Économie Financière, Programme National Persée, vol. 94(1), pages 273-285.
    4. G. Chiesa, 2014. "Safe Assets’ Scarcity, Liquidity and Spreads," Working Papers wp927, Dipartimento Scienze Economiche, Universita' di Bologna.
    5. Diana Bonfim & Moshe Kim, 2012. "Liquidity risk in banking: is there herding?," Working Papers w201218, Banco de Portugal, Economics and Research Department.
    6. Sonia Ondo-Ndong & Laurence Scialom, 2008. "Northern Rock: The anatomy of a crisis – the prudential lessons," EconomiX Working Papers 2008-23, University of Paris Nanterre, EconomiX.
    7. Nikolaou, Kleopatra & Drehmann, Mathias, 2009. "Funding liquidity risk: definition and measurement," Working Paper Series 1024, European Central Bank.
    8. Nikolaou, Kleopatra, 2009. "Liquidity (risk) concepts: definitions and interactions," Working Paper Series 1008, European Central Bank.
    9. Adcock, Christopher & Hua, Xiuping & Mazouz, Khelifa & Yin, Shuxing, 2014. "Does the stock market reward innovation? European stock index reaction to negative news during the global financial crisis," Journal of International Money and Finance, Elsevier, vol. 49(PB), pages 470-491.
    10. Brossard, Olivier & Saroyan, Susanna, 2016. "Hoarding and short-squeezing in times of crisis: Evidence from the Euro overnight money market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 40(C), pages 163-185.

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