Guiding Blind Funds to Banks in Need: The Role of Nontransaction Deposits during Liquidity Crises

Abstract

This paper studies the critical role of nontransaction deposits during and after liquidity crises. In contrast to Gatev and Strahan (2005) who document that the voluntary transaction deposits inflow toward banking system offsets the banks' funds outflow from their loan commitment take-downs, we show that bank heterogeneity, especially due to size differences, leads to a funding imbalance within the banking system. This leaves some institutions with a funding shortage, and the interest-bearing property of nontransaction deposits enables active liability management among banks via a price mechanism. As a result, blind money is guided to banks in need in the form of nontransaction funds. We construct both price and quantity measures for individual bank's nontransaction deposits, and using loan commitments as a contractual binding instrument we show that banks face a non-frictionless financing market for nontransaction funds. However, the cost is far from prohibitive. This suggest that banks, thanks to the NA management, are in a favorable position to provide liquidity when the market refuses to do so, even after taking into account long-run and potentially amplifying competition for nontransaction funds. Nevertheless during liquidity crises we find negative evidence regarding the advantage of banks over finance companies, which is opposite to Gatev and Strahan (2005).