Banks as Liquidity Providers: An Explanation for the Coexistence of Lending and Deposit-Taking

What ties together the traditional commercial banking activities of deposit-taking and lending? We argue that since banks often lend via commitments, their lending and deposit-taking may be two manifestations of one primitive function: the provision of liquidity on demand. There will be synergies be...

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Bibliographic Details
Published in:The Journal of finance (New York) 2002-02, Vol.57 (1), p.33-73
Main Authors: Kashyap, Anil K., Rajan, Raghuram, Stein, Jeremy C.
Format: Article
Language:English
Subjects:
Bank assets
Bank deposits
Bank liquidity
Bank loans
Banks
Cash
Checking accounts
Coinage
Lending
Lines of credit
Liquid assets
Liquidity
Loans
Studies
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Summary:What ties together the traditional commercial banking activities of deposit-taking and lending? We argue that since banks often lend via commitments, their lending and deposit-taking may be two manifestations of one primitive function: the provision of liquidity on demand. There will be synergies between the two activities to the extent that both require banks to hold large balances of liquid assets: If deposit withdrawals and commitment takedowns are imperfectly correlated, the two activities can share the costs of the liquid-asset stockpile. We develop this idea with a simple model, and use a variety of data to test the model empirically.
ISSN:0022-1082
1540-6261
DOI:10.1111/1540-6261.00415