TY  - JOUR
AU  - Gatev,Evan
AU  - Strahan,Philip E.
TI  - Banks' Advantage in Hedging Liquidity Risk: Theory and Evidence from the Commercial Paper Market
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9956
PY  - 2003
Y2  - September 2003
UR  - http://www.nber.org/papers/w9956
L1  - http://www.nber.org/papers/w9956.pdf
N1  - Author contact info:
Evan Gatev
Simon Fraser University
E-Mail: ega8@sfu.ca

Philip Strahan
Carroll School of Management
324B Fulton Hall
Boston College
Chestnut Hill, MA  02467
Tel: 617/552-6430
E-Mail: philip.strahan@bc.edu
AB  - This paper argues that banks have a unique ability to hedge against market-wide liquidity shocks. Deposit inflows provide funding for loan demand shocks that follow declines in market liquidity. Consequently, one dimension of bank  specialness' is that banks can insure firms against systematic declines in market liquidity at lower cost than other financial institutions. We provide supporting empirical evidence from the commercial paper (CP) market. When market liquidity dries up and CP spreads increase, banks experience funding inflows. These flows allow banks to meet increased loan demand from borrowers drawing funds from pre-existing commercial paper backup lines, without running down their holdings of liquid assets. Moreover, the supply of cheap funds is sufficiently large so that pricing on new lines of credit actually falls as market spreads widen.
ER  -