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


  • Anil K. Kashyap,

  • Raghuram Rajan,

  • Jeremy C. Stein

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    • Kashyap and Rajan are from the University of Chicago and Stein is from Harvard University. We thank Eric Bettinger, Qi Chen, and Jeremy Nalewaik for excellent research assistance, and Melissa Cunniffe and Ann Richards for help in preparing the manuscript. We are also grateful for helpful comments from Gary Gorton, George Pennacchi, René Stulz, the referee, and seminar participants at numerous institutions. Research support was provided by the following: CRSP (Rajan), the George J. Stigler Center for the Study of the Economy and the State (Kashyap), MIT's Finance Research Center (Stein), the National Science Foundation (Kash-yap, Rajan, and Stein), and the University of Chicago GSB Faculty Research Fund (Kashyap). The views in this paper do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve system.


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.