Bank Liquidity Hoarding and the Financial Crisis: An Empirical Evaluation
I test and ﬁnd supporting evidence for the precautionary motive hypothesis of liquidity hoarding for U.S. commercial banks during the recent ﬁnancial crisis. I ﬁnd that banks held more liquid assets in anticipation of future losses from securities write-downs. Exposure to securities losses in their investment portfolios and expected loan losses (measured by loan loss reserves) represent key measures of banks’ on-balance sheet risks, in addition to oﬀ-balance sheet liquidity risk stemming from unused loan commitments. Furthermore, unrealized securities losses and loan loss reserves seem to better capture the risks stemming from banks’ asset management and provide supporting evidence for the precautionary nature of liquidity hoarding. Moreover, Iﬁnd that more than one-fourth of the reduction in bank lending during the crisis is due to the precautionary motive.
Full report below…