banks as liquidity providers an explanation for the.pdf

THE JOURNAL OF FINANCE • VOL. LVII, NO. 1 • FEB. 2002 Banks as Liquidity Providers: An Explanation for the Coexistence of Lending and Deposit-Taking ANIL K. KASHYAP, RAGHURAM RAJAN, and JEREMY C. STEIN* ABSTRACT What ties together the traditional commercial banking activities of deposit- taking and lending? We argue that since banks often lend via commitments, their lending and deposit-taking may be two manifestations of one primitive func- tion: the provision of liquidity on demand. There will be synergies between the two activities to the extent that both require banks to hold large balances of liquid assets: If deposit withdrawals and commitment takedowns are imperfectly correlated, the two activities can share the costs of the liquid-asset stockpile. We develop this idea with a simple model, and use a variety of data to test the model empirically. WHAT ARE THE DEFINING CHARACTERISTICS of a bank? Both the legal definition in the United States and the standard answer from economists is that com- mercial banks are institutions that engage in two distinct types of activities, one on each side of the balance sheet—deposit-taking and lending. More precisely, deposit-taking involves issuing claims that are riskless and de- mandable, that is, claims that can be redeemed for a fixed value at any time. Lending involves acquiring costly information about opaque borrowers, and extending credit based on this information. A great deal of theoretical and empirical analysis has been devoted to understanding the circumstances under which each of these two activities might require the services of an intermediary, as opposed to being imp