Chapter

How Do Banks Manage Liquidity Risk?

Evan Gatev, Til Schuermann and Philip E. Strahan

in The Risks of Financial Institutions

Published by University of Chicago Press

Published in print February 2007 | ISBN: 9780226092850
Published online February 2013 | e-ISBN: 9780226092980 | DOI: http://dx.doi.org/10.7208/chicago/9780226092980.003.0004
How Do Banks Manage Liquidity Risk?

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This chapter analyzes how banks were able to manage the systematic liquidity risk and thus weather the 1998 crisis successfully. It evaluates the 1998 crisis to assess differences across banks in their ability to manage systematic liquidity risk. Data show that transactions deposits play a critically significant role in allowing banks to manage their liquidity risk. Banks with high levels of both open commitments and transactions accounts experienced offsetting flows of funds. The deposit-supply response to shocks at high frequency influences the transactions accounts, but demand shocks do not. There is also a positive link between banks' transaction deposit bases and subsequent flows of deposit funds during the crisis weeks. Banks with greater transaction deposit accounts had much lower stock return volatility than other banks. Investors appear to view all banks as equally safe during liquidity crises (or at least during the 1998 crisis).

Keywords: banks; systematic liquidity risk; 1998 crisis; transaction deposit; stock return; demand shocks

Chapter.  10510 words.  Illustrated.

Subjects: Financial Markets

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