NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Liquidity Production in 21st Century Banking

Philip Strahan

NBER Working Paper No. 13798
Issued in February 2008
NBER Program(s):   CF

I consider banks' role in providing funding liquidity (the ability to raise cash on demand) and market liquidity (the ability to trade assets at low cost), and how these roles have evolved. Traditional banks made illiquid loans funded with liquid deposits, thus producing funding liquidity on the liability side of the balance sheet. Deposits are less important in 21st century banks, but funding liquidity from lines of credit and loan commitments has become more important. Banks also provide market liquidity as broker-dealers and traders in securities and derivatives markets, in loan syndication and sales, and in loan securitization. Many institutions besides banks provide market liquidity in similar ways, but banks dominate in producing funding liquidity because of their comparative advantage in managing funding liquidity risk. This advantage stems from the structure of bank balance sheets as well as their access to government-guaranteed deposits and central-bank liquidity.

download in pdf format
   (144 K)

email paper

This paper is available as PDF (144 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w13798

Users who downloaded this paper also downloaded these:
Gatev, Schuermann, and Strahan w12234 Managing Bank Liquidity Risk: How Deposit-Loan Synergies Vary with Market Conditions
Diamond and Rajan w7430 Liquidity Risk, Liquidity Creation and Financial Fragility: A Theory of Banking
Acharya, Shin, and Yorulmazer w15567 Crisis Resolution and Bank Liquidity
Calvo w15425 FINANCIAL CRISES AND LIQUIDITY SHOCKS: A Bank-Run Perspective
Diamond and Rajan w8937 Liquidity Shortages and Banking Crises
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us