Abstract
The synergy between deposit-taking and lending is the specialness of banking institutions as financial intermediaries. The activities from both balance sheet and off-balance sheet could share the cost of holding liquid assets, which is based on the fact that draw-downs on loan commitments and withdrawals on deposits are not perfectly correlated. However, it matters to reveal the dynamic connections between the two sources of liquidity risk for the purpose of analyzing the real impact on individual banks from a more microscopic perspective. As the evidence shows in this study, a winner-take-all effect is hidden in the synergy and could cause local double cash outflow from particular banks. It also provides new insights on liquidity management of commercial banks.
Highlights
The liquidity shock in the 2007-2009 financial crises has been studied more intensively in recent literature
The rest of this paper is organized as follows: section 2 presents an overview of loan commitments and deposits in commercial banks; section 3 shows the empirical analysis of the dynamics of synergy effect; section 4 presents an extension of analysis and section 5 concludes this paper
It still appears to be a dominant way of issuing C&I loans: the majority of C&I loans are made under the commitments offered by commercial banking institutions, and the proportion has been continuously over 70% since the beginning of this century
Summary
The liquidity shock in the 2007-2009 financial crises has been studied more intensively in recent literature. The specific form of liquidity shock has evolved from deposit outflow to the draw-downs of unused lines of credit and interbank financial arrangements External factors such as the behavioral patterns of borrowers and depositors are no longer perfectly exogenous to the liquidity run dynamics. The empirical evidence shows that positive correlations exist when both the outflows and draw-downs are controlled, which indicates that a bigger deposits outflow is typically accompanied by a greater loan commitments draw-down in some specific banks This winner-take-all effect could threaten financial health of certain banks and even drive some institutions to fail even if the whole banking system is abundant with liquidity. The rest of this paper is organized as follows: section 2 presents an overview of loan commitments and deposits in commercial banks; section 3 shows the empirical analysis of the dynamics of synergy effect; section 4 presents an extension of analysis and section 5 concludes this paper
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