Abstract

 
 
 The paper explores the impact of uncertainty on bank liquidity hoarding, particularly providing new insights on the nature of the impact by bank-level heterogeneity. We consider the cross-sectional dispersion of shocks to key bank variables to estimate uncertainty in the banking sector and include all banking items to construct a comprehensive measure of bank liquidity hoarding. Using a sample of Vietnamese banks during 2007–2019, we document that banks tend to increase total liquidity hoarding in response to higher uncertainty; this pattern is still valid for on- and off-balance sheet liquidity hoarding. Further analysis with bank-level heterogeneity indicates that the impact of banking uncertainty on liquidity hoarding is significantly stronger for weaker banks, i. e., banks that are smaller, more poorly capitalized, and riskier. In testing the “search for yield” hypothesis to explain the linkage between uncertainty and bank liquidity hoarding, we do not find it to be the case. Our findings remain extremely robust after multiple robustness tests.
 
 
Highlights
Exploring the effects of uncertainty on financial intermediaries has been a fast-growing stream in the recent literature
The results indicate that the coefficient on uncertainty is significantly positive in all columns, regardless of the uncertainty measures used. These results suggest a rise in bank liquidity hoarding following periods of higher uncertainty in banking
A one standard deviation increase in uncertainty captured by the dispersion of shocks to assets, funding, and profitability (6.75, 7.89, and 0.39, respectively) may increase the total liquidity hoarding normalized by total assets by 1.904 (6.75*0.282), 1.649 (7.89*0.209), and 0.276 (0.39*0.708) percentage points, respectively
Summary
Exploring the effects of uncertainty on financial intermediaries has been a fast-growing stream in the recent literature. This study expands the existing literature by exploring the impact of uncertainty on bank liquidity hoarding — constituting a key channel through which uncertainty could drive the economy. The core function of banks in the economy is to create liquidity to supply to real sectors (Berger & Bouwman, 2009), so hoarding liquidity could be seen as a way of banks destroying such function (Caballero & Krishnamurthy, 2008). Liquidity hoarding may increase systemic risks via spillover effects since the behavior of liquidity hoarding and asset fire sale actions by stressed banks could trigger down other banks (Diamond & Rajan, 2011)
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