NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Banks as Liquidity Providers: An Explanation for the Co-Existence of Lending and Deposit-Taking

Anil K. Kashyap, Raghuram Rajan, Jeremy C. Stein

NBER Working Paper No. 6962
Issued in February 1999
NBER Program(s):   CF   ME

This paper addresses the following question: what ties together the traditional commercial banking activities of deposit-taking and lending? We begin by observing that since banks often lend via commitments, or credit lines, their lending and deposit-taking may be two manifestations of the same primitive function: the provision of liquidity on demand. After all, once the decision to extend a line of credit has been made, it is really nothing more than a checking account with overdraft privileges. This observation leads us to argue that there will naturally be synergies between the two activities, to the extent that both require banks to hold large volumes of liquid assets (cash and securities) on their balance sheets: if deposit withdrawals and commitment takedowns are imperfectly correlated, the two activities can share any deadweight costs of holding the liquid assets. We develop this idea with a simple model, and then use a variety of data to test the model's empirical implications.

download in pdf format
   (249 K)

email paper

This paper is available as PDF (249 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Published:

  • Journal of Finance, Vol. 57, no. 1 (February 2002): 33-73 ,
  • Anil Kashyap & Raghuram Rajan & Jeremy S. Stein, 1998. "Banks as liquidity providers: an explanation for the co-existence of lending and deposit-taking," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 90-112.

Users who downloaded this paper also downloaded these:
Diamond and Rajan w7430 Liquidity Risk, Liquidity Creation and Financial Fragility: A Theory of Banking
Diamond and Rajan w8937 Liquidity Shortages and Banking Crises
Gatev, Schuermann, and Strahan w12234 Managing Bank Liquidity Risk: How Deposit-Loan Synergies Vary with Market Conditions
Kashyap and Stein w4821 The Impact of Monetary Policy on Bank Balance Sheets
Diamond and Rajan w7431 A Theory of Bank Capital
 
Publications
Activities
Meetings
Data
People
About

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

Contact Us