NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
loading...

Liquidity Transformation and Fragility in the US Banking Sector

Qi Chen, Itay Goldstein, Zeqiong Huang, Rahul Vashishtha

NBER Working Paper No. 27815
Issued in September 2020
NBER Program(s):Corporate Finance, Monetary Economics

This paper provides, for the first time, large-scale evidence that liquidity transformation by banks creates fragility, as their uninsured depositors face an incentive to withdraw their money before others (a so-called panic run). Such fragility manifests itself in stronger sensitivity of deposit flows to bank performance. A deterioration in the aggregate conditions in the banking system makes the fragility within each bank stronger. We run multiple tests to show that depositors’ motives are not driven purely by fundamentals, but rather that the element of panic, leading them to think about what other depositors will do, is important in the data. We analyze the tradeoff banks face when setting their level of liquidity transformation, and show how they use deposit insurance to mitigate some of its negative effects.

You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.

Access to NBER Papers

You are eligible for a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.

E-mail:

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w27815

 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

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

Contact Us