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Liquidity Production in 21st Century Banking

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  • Philip Strahan
Abstract
I consider banks' role in providing funding liquidity (the ability to raise cash on demand) and market liquidity (the ability to trade assets at low cost), and how these roles have evolved. Traditional banks made illiquid loans funded with liquid deposits, thus producing funding liquidity on the liability side of the balance sheet. Deposits are less important in 21st century banks, but funding liquidity from lines of credit and loan commitments has become more important. Banks also provide market liquidity as broker-dealers and traders in securities and derivatives markets, in loan syndication and sales, and in loan securitization. Many institutions besides banks provide market liquidity in similar ways, but banks dominate in producing funding liquidity because of their comparative advantage in managing funding liquidity risk. This advantage stems from the structure of bank balance sheets as well as their access to government-guaranteed deposits and central-bank liquidity.

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  • Philip Strahan, 2008. "Liquidity Production in 21st Century Banking," NBER Working Papers 13798, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:13798
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    2. Michel Aglietta & Laurence Scialom, 2009. "Permanence and Innovation in Central Banking Policy for Financial Stability," Palgrave Macmillan Books, in: Robert R. Bliss & George G. Kaufman (ed.), Financial Institutions and Markets, chapter 8, pages 187-211, Palgrave Macmillan.
    3. Iñaki Aldasoro & Sebastian Doerr & Haonan Zhou, 2023. "Non-bank lending during crises," BIS Working Papers 1074, Bank for International Settlements.
    4. Asif Iqbal Siddiqui & Dora Marinova, 2016. "Funding Liquidity Risk, Syndication Behavior And The Risk Culture Of The Australian Venture Capital Industry," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 64(05), pages 1279-1297, December.
    5. Jean-Paul Pollin, 2009. "Réguler la liquidité bancaire," Revue d'Économie Financière, Programme National Persée, vol. 94(1), pages 273-285.
    6. Jose M. Berrospide, 2013. "Bank liquidity hoarding and the financial crisis: an empirical evaluation," Finance and Economics Discussion Series 2013-03, Board of Governors of the Federal Reserve System (U.S.).
    7. Sonia Ondo Ndong & Laurence Scialom, 2009. "Northern Rock: The Anatomy of a Crisis—The Prudential Lessons," Palgrave Macmillan Books, in: Robert R. Bliss & George G. Kaufman (ed.), Financial Institutions and Markets, chapter 3, pages 51-74, Palgrave Macmillan.
    8. Diana Bonfim & Moshe Kim, 2012. "Liquidity risk in banking: is there herding?," Working Papers w201218, Banco de Portugal, Economics and Research Department.
    9. Nikolaou, Kleopatra & Drehmann, Mathias, 2009. "Funding liquidity risk: definition and measurement," Working Paper Series 1024, European Central Bank.
    10. Brossard, Olivier & Saroyan, Susanna, 2016. "Hoarding and short-squeezing in times of crisis: Evidence from the Euro overnight money market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 40(C), pages 163-185.
    11. Gabriella Chiesa, 2020. "Safe Assets, Credit Provision and Debt Management," Open Economies Review, Springer, vol. 31(3), pages 637-667, July.
    12. Christoph Memmel & Andrea Schertler, 2012. "The Dependency of the Banks' Assets and Liabilities: Evidence from Germany," European Financial Management, European Financial Management Association, vol. 18(4), pages 602-619, September.
    13. Muhammad Saifuddin Khan, 2018. "The Role of Liquidity in Financial Intermediation," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2018, January-A.
    14. Olivier Brossard & Susanna Saroyan, 2016. "Hoarding and short-squeezing in times of crisis: Evidence from the Euro overnight money market," Post-Print hal-01293693, HAL.
    15. G. Chiesa, 2014. "Safe Assets Scarcity, Liquidity and Spreads," Working Papers wp927, Dipartimento Scienze Economiche, Universita' di Bologna.
    16. Nikolaou, Kleopatra, 2009. "Liquidity (risk) concepts: definitions and interactions," Working Paper Series 1008, European Central Bank.
    17. Adcock, Christopher & Hua, Xiuping & Mazouz, Khelifa & Yin, Shuxing, 2014. "Does the stock market reward innovation? European stock index reaction to negative news during the global financial crisis," Journal of International Money and Finance, Elsevier, vol. 49(PB), pages 470-491.

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