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Liquidity Transformation and Fragility in the US Banking Sector

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Listed:
  • Qi Chen
  • Itay Goldstein
  • Zeqiong Huang
  • Rahul Vashishtha

Abstract

A key role of banks is liquidity transformation, which is also thought to create fragility, as uninsured depositors face an incentive to withdraw money before others (a so-called panic run). Despite much theoretical work, there has not been much empirical evidence establishing this mechanism. In this paper, we provide the first large-scale evidence of this mechanism. Banks that perform more liquidity transformation exhibit higher fragility, manifested by stronger sensitivities of uninsured deposit flows to bank performance and greater levels of uninsured deposit outflows when performance is poor. We also explore the effects of deposit insurance and systemic risk.

Suggested Citation

  • Qi Chen & Itay Goldstein & Zeqiong Huang & Rahul Vashishtha, 2020. "Liquidity Transformation and Fragility in the US Banking Sector," NBER Working Papers 27815, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:27815
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    2. König, Philipp Johann & Mayer, Paul & Pothier, David, 2022. "Optimal timing of policy interventions in troubled banks," Discussion Papers 10/2022, Deutsche Bundesbank.
    3. Thorsten Beck & Robin Döttling & Thomas Lambert & Mathijs Dijk, 2023. "Liquidity creation, investment, and growth," Journal of Economic Growth, Springer, vol. 28(2), pages 297-336, June.
    4. König, Philipp Johann & Laux, Christian & Pothier, David, 2021. "The leverage effect of bank disclosures," Discussion Papers 31/2021, Deutsche Bundesbank.

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    More about this item

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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