The Journal of Finance

The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.

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Liquidity Transformation and Fragility in the U.S. Banking Sector

Published: 10/13/2024   |   DOI: 10.1111/jofi.13390

QI CHEN, ITAY GOLDSTEIN, ZEQIONG HUANG, RAHUL VASHISHTHA

Liquidity transformation, a key role of banks, is thought to increase fragility, as uninsured depositors face an incentive to withdraw money before others (a so‐called panic run). Despite much theoretical work, however, there is little empirical evidence establishing this mechanism. In this paper, we provide the first large‐scale evidence of this mechanism. Banks that engage in more liquidity transformation exhibit higher fragility, as captured by stronger sensitivities of uninsured deposit flows to bank performance and greater levels of uninsured deposit outflows when performance is poor. We also explore the effects of deposit insurance and systemic risk.