Banks as Liquidity Providers: An Explanation for the Co-Existence of Lending and Deposit-Taking

Anil Kashyap, Raghuram Rajan and Jeremy Stein

No 6962, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper addresses the following question: what ties together the traditional commercial banking activities of deposit-taking and lending? We begin by observing that since banks often lend via commitments, or credit lines, their lending and deposit-taking may be two manifestations of the same primitive function: the provision of liquidity on demand. After all, once the decision to extend a line of credit has been made, it is really nothing more than a checking account with overdraft privileges. This observation leads us to argue that there will naturally be synergies between the two activities, to the extent that both require banks to hold large volumes of liquid assets (cash and securities) on their balance sheets: if deposit withdrawals and commitment takedowns are imperfectly correlated, the two activities can share any deadweight costs of holding the liquid assets. We develop this idea with a simple model, and then use a variety of data to test the model's empirical implications.

Date: 1999-02
New Economics Papers: this item is included in nep-fmk and nep-pke
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Published as Journal of Finance, Vol. 57, no. 1 (February 2002): 33-73
Published as Anil Kashyap & Raghuram Rajan & Jeremy S. Stein, 1998. "Banks as liquidity providers: an explanation for the co-existence of lending and deposit-taking," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 90-112.

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Related works:
Journal Article: Banks as Liquidity Providers: An Explanation for the Coexistence of Lending and Deposit‐taking (2002)
Working Paper: Banks as liquidity providers: an explanation for the co-existence of lending and deposit-taking (1998)
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