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The Risks of Financial Institutions$
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Mark Carey and Rene M. Stulz

Print publication date: 2007

Print ISBN-13: 9780226092850

Published to Chicago Scholarship Online: February 2013

DOI: 10.7208/chicago/9780226092980.001.0001

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PRINTED FROM CHICAGO SCHOLARSHIP ONLINE (www.chicago.universitypressscholarship.com). (c) Copyright University of Chicago Press, 2021. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in CHSO for personal use.date: 17 September 2021

How Do Banks Manage Liquidity Risk?

How Do Banks Manage Liquidity Risk?

Evidence from the Equity and Deposit Markets in the Fall of 1998

Chapter:
(p.105) 3 How Do Banks Manage Liquidity Risk?
Source:
The Risks of Financial Institutions
Author(s):

Evan Gatev

Til Schuermann

Philip E. Strahan

Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226092980.003.0004

This chapter analyzes how banks were able to manage the systematic liquidity risk and thus weather the 1998 crisis successfully. It evaluates the 1998 crisis to assess differences across banks in their ability to manage systematic liquidity risk. Data show that transactions deposits play a critically significant role in allowing banks to manage their liquidity risk. Banks with high levels of both open commitments and transactions accounts experienced offsetting flows of funds. The deposit-supply response to shocks at high frequency influences the transactions accounts, but demand shocks do not. There is also a positive link between banks' transaction deposit bases and subsequent flows of deposit funds during the crisis weeks. Banks with greater transaction deposit accounts had much lower stock return volatility than other banks. Investors appear to view all banks as equally safe during liquidity crises (or at least during the 1998 crisis).

Keywords:   banks, systematic liquidity risk, 1998 crisis, transaction deposit, stock return, demand shocks

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