Banks as Liquidity Multipliers

Sylvain Carré and Damien Klossner

The Review of Financial Studies, 2024, vol. 37, issue 1, 265-307

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.

JEL-codes: C72 G01 G21 (search for similar items in EconPapers)
Date: 2024
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