Liquid Assets in Banks: Theory and Practice

Guillermo Alger and Ingela Alger ()
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Guillermo Alger: Analysis Group Economics

No 446, Boston College Working Papers in Economics from Boston College Department of Economics

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.

Keywords: liquid assets; banks; liquidity shocks (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: Written
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Persistent link: http://EconPapers.repec.org/RePEc:boc:bocoec:446

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