Dissertations, Theses, and Capstone Projects
Date of Degree
9-2025
Document Type
Doctoral Dissertation
Degree Name
Doctor of Philosophy
Program
Business
Advisor
Linda Allen
Committee Members
Jennie Bai
Peng Lin
Yao Shen
Dexin Zhou
Subject Categories
Economics | Physical Sciences and Mathematics
Abstract
This dissertation consists of three chapters that examine how banks transmit monetary policy and react to the ambiguity via liquidity provision.
Chapter 1: This chapter analyzes both market conditions and bank balance sheets separately, and use these analyses to extend the Liquidity Mismatch Index (LMI)(Journal of Finance, 2017) so as to provide a granular, bank specific measure that covers the period from 2002 to 2025. My findings indicate that since the financial crisis, the banking system has increased its holdings of cash (primarily through interest-bearing balances), securities (with increasing HTM securities), and loans. However, when incorporating market dynamics, I observe that short-term assets have gained a higher weight in the total asset-side liquidity over time. Consequently, banks’ assets have become increasingly liquid. On the liability side, the banking system has increased its holdings of uninsured deposits, a consequence I study in my work on unconventional monetary policy such as quantitative easing (QE). Simultaneously, the demand for liquidity has decreased during this regime. On net, I find that banks create less liquidity during QE periods. I further examine the relationship between bank liquidity creation and non-interest income. My findings indicate that since 2013, banks with higher non-interest income hold more liquid assets and liabilities. In particular, although these banks generate more long-term loans, they simultaneously hold more short-term assets. This balance results in less liquidity creation on the asset side. By creating this unique data series, I study bank liquidity provision in my companion research papers.
Chapter 2: This chapter exploits exogenous liquidity demand shocks in the wake of natural disasters to detect the ongoing role of banks as marginal liquidity providers and as conduits for monetary policy. Using the Liquidity Mismatch Index (Journal of Finance, 2017), we measure the bank’s increase in marginal liquidity during the six months following natural disasters. This liquidity supply initially takes the form of increases in demandable deposits and other liquid liabilities during the focal disaster quarter, and increases in long-term lending during the following quarter, with return to pre-disaster levels in the second quarter following the natural disaster. Banks’ marginal liquidity provision has beneficial effects on local economic conditions, with increases in the growth rate of employment with particular gains in the construction industry. Overall, improvements in local economic conditions last beyond the six-month liquidity provision period and yield local advantages lasting beyond the final quarter of banks’ marginal liquidity provision. Applying these results, we find that banks sluggishly transmit central bank monetary policy via liquidity provision during unconventional monetary policy periods. During periods of quantitative easing, banks’ liquidity responses were smaller and delayed, suggesting that aggressive monetary policies crowd out private bank liquidity provision.
Chapter 3: Long term banking relationships generate private information that allows the bank to offer credit to financially-constrained, informationally-opaque firms at interest rates that include monopoly rents. However, if the bank’s financial condition is ambiguous (exposed to Knightian uncertainty), potential borrowers may exaggerate their subjective perceptions of adverse future outcomes such as bank failure that would interrupt the supply of credit, thereby inducing customers to run to less ambiguous competitor banks. We show that banks mitigate this costly loss in bank monopoly franchise value by creating liquidity at the bank level. Banks create liquidity by utilizing short-term liabilities to fund long term, illiquid loans and other assets. This credibly signals bank relationship customers that the bank has the resources to satisfy future loan demand because the bank can absorb costly liquidity risk exposure. Ambiguity-averse customers are thus less likely to run, thereby retaining their valuable banking relationship and preserving the bank’s monopoly access to private information. We show that ambiguity-linked liquidity provision prevents runs by uninsured deposits. Further, bank customers’ ambiguity and precautionary cash holdings decline when their relationship banks create liquidity. Finally, bank insiders provide more liquidity when their stock options are at or out of the money, and sell shares when the bank’s ambiguity is high.
Recommended Citation
Liu, Jingdan, "Essays on Bank Liquidity Provision" (2025). CUNY Academic Works.
https://academicworks.cuny.edu/gc_etds/6389
