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

Qi Chen; Itay Goldstein; ZEQIONG HUANG; Rahul Vashishtha

doi:10.1111/jofi.13390

journal article Oct 13, 2024

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

Qi Chen

Itay Goldstein ZEQIONG HUANG Rahul Vashishtha

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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Details

Published: Oct 13, 2024
Vol/Issue: 79(6)
Pages: 3985-4036
License: View

Authors

Sinopec (China)

Wharton School, University of Pennsylvania and NBER ,

Fuqua School of Business, Duke University

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

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

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