Mergers And Acqisitions

FDIC Center for fiscal Research
Working Paper No. 2006-03
Managing bound Liquidity Risk:
How Deposit-Loan Synergies Vary With Market Conditions

December 2005

national Deposit Insurance Corporation Center for fiscal Research
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MANAGING commit LIQUIDITY RISK:
HOW DEPOSIT-LOAN SYNERGIES VARY WITH MARKET CONDITIONS†

Evan Gatev
Boston College
Til Schuermann
national Reserve cuss of New York, Wharton Financial Institutions Center
Philip E. Strahan*
Boston College, Wharton Financial Institutions Center & NBER
December 2005

JEL Codes: G18; G21
Key Words: Liquidity; banking; financial crisis

Abstract
Unused contribute commitments expose banks to systematic liquidity risk, simply this exposure
can be reduced by combining impart commitments with transactions deposits. We show
that bank equity volatility increases with unused loan commitments, but this increase is
reduced for banks with high levels of transaction deposits. This deposit-lending synergy
becomes heretofore more powerful during periods of tight liquidity, when nervous investors
move capital into their banks. Thus, the simultaneous taking of deposits and lending may
be thought of as a liquidity hedge.





†

We would like to thank the FDIC Center for Financial Research for financial support, as well as for
adjuvant comments on the research. Kristin Wilson assisted with preparation of the data. Any views
expressed fiddle those of the authors only and not necessarily those of the Federal Reserve Bank of New
York or the Federal Reserve System.

*

Corresponding author: Strahan is at Boston College, 140 Commonwealth Avenue, Chestnut Hill MA,
02467, Philip.strahan@bc.edu, 617-552-6430.

I. Introduction
Banks adopt traditionally provided liquidity on demand, both to borrowers with
open lines of credit and loan commitments (we use these terms interchangeably), and to
depositors in the form of checking and other(a) transactions accounts. Both contracts allow
customers to receive cash on...If you want to come in a full essay, order it on our website: Orderessay



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