Hedging bank liquidity risk

Evan Gatev, Til Schuermann and Philip E. Strahan

No 1024, Proceedings from Federal Reserve Bank of Chicago

Abstract: Liquidity risk in banking has been attributed to transactions deposits and their potential to spark runs or panics. We show instead that transactions deposits help banks hedge liquidity risk from unused loan commitments. Bank stock-return volatility increases with unused commitments, but the increase is smaller for banks with high levels of transactions deposits. This deposit-lending risk management synergy becomes more powerful during periods of tight liquidity, when nervous investors move funds into their banks. Our results reverse the standard notion of liquidity risk at banks, where runs from depositors had been seen as the cause of trouble.

Keywords: Hedging (Finance); Liquidity (Economics) (search for similar items in EconPapers)
Pages: 189-203
Date: 2006
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Published in Conference on Bank Structure and Competition (2006: 42nd) ; Innovations in real estate markets : risk, rewards, and the role of regulation

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