The Determinants of Bank Liquid Asset Holdings
Bank liquid asset holdings vary significantly across banks and through time. The determinants of liquid asset holdings from the corporate finance literature are not useful to predict banks’ liquid asset holdings. Banks have an investment motive to hold liquid assets, so that when their lending opportunities are better, they hold fewer liquid assets. We find strong support for the investment motive. Large banks hold much more liquid assets after the Global Financial Crisis (GFC), and this change cannot be explained using models of liquid asset holdings estimated before the GFC. We find evidence supportive of the hypothesis that the increase in liquid assets of large banks is due at least in part to the post-GFC regulatory changes.
We are grateful for excellent research assistance from Jonas Elenskis, Byungwook Kim, and Leandro Sanz. We are grateful to Mike Wittry for useful discussions. We thank Viral Acharya and participants at the Virtual Corporate Finance seminar and seminars at the Ohio State University, the University of Texas at San Antonio, and Erasmus University Rotterdam for comments. Stulz is at times retained by financial institutions or their attorneys as a consultant or as an expert. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.