Why Are Bank Holdings of Liquid Assets So High?

Rene M. Stulz, Alvaro G. Taboada and Mathijs A. van Dijk
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Rene M. Stulz: Ohio State U
Alvaro G. Taboada: Mississippi State U
Mathijs A. van Dijk: Erasmus U Rotterdam

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: Aggregate bank liquid asset holdings (reserves and liquid securities) increased from 13% to 33% of assets from before the Global Financial Crisis (GFC) to 2020. If banks allocate their balance sheet by equalizing the marginal risk-adjusted expected return across asset classes, they hold more liquid assets when they have less advantageous lending opportunities. We show that, indeed, holdings of liquid assets are negatively related to lending opportunities. Our findings indicate that bank liquid asset holdings grew since the GFC because of weak lending opportunities, though regulatory changes help explain the higher liquid asset holdings of the largest banks before COVID.

JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2023-05
New Economics Papers: this item is included in nep-fdg and nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2023-09

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