{"id":1399,"date":"2007-11-01T14:21:33","date_gmt":"2007-11-01T18:21:33","guid":{"rendered":"http:\/\/www.prefblog.com\/?p=1399"},"modified":"2007-11-01T14:21:33","modified_gmt":"2007-11-01T18:21:33","slug":"banks-advantage-in-hedging-liquidity-risk","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=1399","title":{"rendered":"Banks Advantage in Hedging Liquidity Risk"},"content":{"rendered":"<p>It has taken me far too long to find this reference! Therefore, I am re-posting under the <a href=\"http:\/\/www.prefblog.com\/?cat=20\">Interesting External Papers<\/a> classification the following (very slightly edited)\u00a0comments from <a href=\"http:\/\/www.prefblog.com\/?p=1193\">September 14<\/a>!<\/p>\n<p>Cushioning fear-driven liquidity shocks is <a href=\"http:\/\/www.tc.umn.edu\/~finsem\/liquidity_ps20204.pdf\">the banks&#8217; bread and butter<\/a>:<\/p>\n<blockquote>\n<p>This paper argues that banks have a unique ability to hedge against market-wide liquidity shocks. Deposit inflows provide funding for loan demand shocks that follow declines in market liquidity. Consequently, one dimension of bank \u201cspecialness\u201d is that banks can insure firms against systematic declines in market liquidity at lower cost than other financial institutions. We provide supporting empirical evidence from the commercial paper (CP) market. When market liquidity dries up and CP spreads increase, banks experience funding inflows. These flows allow banks to meet increased loan demand from borrowers drawing funds from pre-existing commercial paper backup lines, without running down their holdings of liquid assets. Using bank-level data, we provide evidence that implicit government support for banks during crises explains the funding flows.<\/p>\n<\/blockquote>\n<p>From the same paper, incidentally:<\/p>\n<blockquote>\n<p>Banks\u2019 functioning as liquidity insurance providers originated early in the development of the commercial paper market. In 1970, Penn Central Transportation Company filed for bankruptcy with more than $80 million in commercial paper outstanding. As a result of their default, investors lost confidence in other large commercial paper issuers, making it difficult for some of these firms to refinance their paper as it matured. The Federal Reserve responded to the Penn Central crisis by lending aggressively to banks through the discount window and encouraging them, in turn, to provide liquidity to their large borrowers (Kane, 1974). In response to this difficulty, commercial paper issuers thereafter began purchasing backup lines of credit from banks to insure against future funding disruptions (Saidenberg and Strahan, 1999).<\/p>\n<\/blockquote>\n<p><!--694f06e8c1518d840174454b22324f51--><\/p>\n","protected":false},"excerpt":{"rendered":"<p>It has taken me far too long to find this reference! Therefore, I am re-posting under the Interesting External Papers classification the following (very slightly edited)\u00a0comments from September 14! Cushioning fear-driven liquidity shocks is the &hellip;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[12],"tags":[],"class_list":["post-1399","post","type-post","status-publish","format-standard","hentry","category-interesting-external-papers"],"_links":{"self":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/1399","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1399"}],"version-history":[{"count":0,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/1399\/revisions"}],"wp:attachment":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1399"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1399"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1399"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}