journal article Oct 13, 2024

Liquidity Transformation and Fragility in the U.S. Banking Sector

The Journal of Finance Vol. 79 No. 6 pp. 3985-4036 · Wiley
View at Publisher Save 10.1111/jofi.13390
Abstract
ABSTRACTLiquidity transformation, a key role of banks, is thought to increase fragility, as uninsured depositors face an incentive to withdraw money before others (a so‐called panic run). Despite much theoretical work, however, there is little empirical evidence establishing this mechanism. In this paper, we provide the first large‐scale evidence of this mechanism. Banks that engage in more liquidity transformation exhibit higher fragility, as captured by stronger sensitivities of uninsured deposit flows to bank performance and greater levels of uninsured deposit outflows when performance is poor. We also explore the effects of deposit insurance and systemic risk.
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Published
Oct 13, 2024
Vol/Issue
79(6)
Pages
3985-4036
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Cite This Article
Qi Chen, Itay Goldstein, ZEQIONG HUANG, et al. (2024). Liquidity Transformation and Fragility in the U.S. Banking Sector. The Journal of Finance, 79(6), 3985-4036. https://doi.org/10.1111/jofi.13390
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