Do banks adjust their liquidity to cope with environmental variation? A study of bank deregulation

Abstract

The effect of bank deregulation on adjustment speed of bank liquidity is the focus of this paper. We find that banks tend to increase their adjustment speed of liquidity in response to bank deregulation. Banks tend to escape their current states and move to states with less deregulation. Those banks that move to less deregulated states reduce their adjustment speed. A strategic movement of headquarters helps banks to fend off competitive pressure. The environmental factors of population and personal income reduce the market-based flexibility of banks. However, higher interest expenses incentivise banks to increase their speed. Surviving banks and acquiring banks react as market-makers whereas target banks respond as market-takers. Failed banks lose their distinct competencies to react properly when environmental variation occurs. Having a larger network and operating in a larger environment, banks affiliated with multi-bank holding companies are able to increase their liquidity adjustment speed. The observable trends of how banks adjust liquidity in response to bank deregulation have important regulatory implications in reducing the environmental challenges faced by banks.