A Crisis of Banks as Liquidity Providers

Authors

  • VIRAL V. ACHARYA,

  • NADA MORA

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    • Acharya is with New York University, NBER, CEPR, and ECGI. Mora is with the Federal Reserve Bank of Kansas City. This paper previously circulated as “Are Banks Passive Liquidity Backstops? Deposit Rates and Flows during the 2007-2009 Crisis.” Jacob Schak, Paul Rotilie, Thad Sieracki, Jon Christensson, and Kristen Regehr provided valuable research assistance. We are grateful to Ruth Judson for her help with the Bank Rate Monitor data. We thank Sumit Agarwal; Heitor Almeida; David Backus; Morten Bech; Lamont Black; Francisco Covas; Bob DeYoung; Cam Harvey (the Editor); Charlie Kahn; Anil Kashyap; Bill Keeton; Michal Kowalik; Lubo Litov; Jamie McAndrews; Ouarda Merrouche; Chuck Morris; Wayne Passmore; Jack Reidhill; Joao Santos; Anthony Saunders; Philipp Schnabl; Ken Spong; Phil Strahan; an Associate Editor; anonymous referees; and participants at the American Finance Association Meeting, the Financial Management Association Meeting, the Federal Reserve's “Day Ahead” Conference on Financial Markets and Institutions, the Chicago Fed Conference on Bank Structure and Competition, the Financial Intermediation Research Society Meeting, the Office of Financial Research, the World Bank, and the Federal Reserve Banks of New York, Philadelphia, and San Francisco for helpful comments. The views expressed herein are those of the authors and do not necessarily reflect the positions of the Federal Reserve Bank of Kansas City or the Federal Reserve System. Any remaining errors are our own.


ABSTRACT

Can banks maintain their advantage as liquidity providers when exposed to a financial crisis? While banks honored credit lines drawn by firms during the 2007 to 2009 crisis, this liquidity provision was only possible because of explicit, large support from the government and government-sponsored agencies. At the onset of the crisis, aggregate deposit inflows into banks weakened and their loan-to-deposit shortfalls widened. These patterns were pronounced at banks with greater undrawn commitments. Such banks sought to attract deposits by offering higher rates, but the resulting private funding was insufficient to cover shortfalls and they reduced new credit.

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