Liquidity Management of Heterogeneous Banks during the Great Recession

Toshiaki Ogawa
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Toshiaki Ogawa: Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: toshiaki.ogawa@boj.or.jp)

No 20-E-05, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: I construct a dynamic stochastic general equilibrium model to investigate how the liquidity management of different size banks responds to liquidity and loan demand shocks. My investigation shows the following. Compared with small banks, large banks tend to be net borrowers and thus more exposed to liquidity risk. In response to negative liquidity shocks, large banks decrease their credit supply while small ones increase theirs. In response to negative loan demand shocks, both large and small banks decrease their credit supply. Connecting these implications with the panel data, I argue that negative liquidity shocks served as the main driver of the Great Recession initially, and negative demand shocks did so later, and that demand shocks accounted for two thirds of the greatest fall in aggregate loans during the recession.

Keywords: Great Recession; Bank liquidity management; Occasionally binding constraints; Heterogeneous bank model; General equilibrium model (search for similar items in EconPapers)
JEL-codes: E00 G01 G18 G20 G21 (search for similar items in EconPapers)
Date: 2020-03
New Economics Papers: this item is included in nep-ban, nep-dge and nep-mac
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ime:imedps:20-e-05

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