Banks' Advantage in Hedging Liquidity Risk: Theory and Evidence from the Commercial Paper Market / Evan Gatev, Philip E. Strahan.

Format:

Book

Author/Creator:

Gatev, Evan.

Contributor:

National Bureau of Economic Research.

Strahan, Philip E.

Series:

Working Paper Series (National Bureau of Economic Research) no. w9956.

NBER working paper series no. w9956

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Banks' Advantage in Hedging Liquidity Risk

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2003.

Summary:

This paper argues that banks have a unique ability to hedge against market-wide liquidity shocks. Deposit inflows provide funding for loan demand shocks that follow declines in market liquidity. Consequently, one dimension of bank specialness' is that banks can insure firms against systematic declines in market liquidity at lower cost than other financial institutions. We provide supporting empirical evidence from the commercial paper (CP) market. When market liquidity dries up and CP spreads increase, banks experience funding inflows. These flows allow banks to meet increased loan demand from borrowers drawing funds from pre-existing commercial paper backup lines, without running down their holdings of liquid assets. Moreover, the supply of cheap funds is sufficiently large so that pricing on new lines of credit actually falls as market spreads widen.

Notes:

Print version record

September 2003.