Banks as Liquidity Multipliers

Sylvain Carré () and Damien Klossner
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Sylvain Carré: UP1 - Université Paris 1 Panthéon-Sorbonne, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique
Damien Klossner: Swiss National Bank

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: We characterize the interaction between banks' liquid assets purchases and deposit issuance decisions. Using global games, we derive a liquidity multiplier: the amount of deposits a bank can create when endowed with one additional unit of liquid asset to maintain a given level of liquidity risk. In our central theorem, we prove it is larger than unity. This entails that banks have a special role in enhancing liquidity provision, "multiplying" liquid assets into a larger quantity of deposits. Our theory has implications for banks' balance sheet choices, the pricing of liquid securities, and the role of public liquidity provision.

Date: 2024-01-01
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Published in Review of Financial Studies, 2024, 37 (1), pp.265-307. ⟨10.1093/rfs/hhad053⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:cesptp:hal-05111681

DOI: 10.1093/rfs/hhad053

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