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Bank liquidity, macroeconomic risk, and bank risk: Evidence from the Financial Services Modernization Act
Author(s) -
Chen IJu,
Lee YuYi,
Liu YongChin
Publication year - 2020
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/eufm.12208
Subject(s) - market liquidity , liquidity risk , chinese financial system , business , financial system , financial risk management , bank rate , modernization theory , liquidity crisis , risk management , economics , finance , monetary economics , central bank , monetary policy , economic growth , law , political science , china
We investigate the empirical relationship between macroeconomic risk, bank liquidity, and bank risk surrounding the 1999 Financial Services Modernization Act. We propose that bank risk and liquidity are positively related as macroeconomic risk increases, and that this effect is particularly strong after the Gramm–Leach–Bliley Act (GLBA). We test our hypotheses by collecting data from 1994 to 2006 for banks in the United States. The results show that banks flush with liquid assets in a high macroeconomic risk environment conducted more lending activities following the enactment of the GLBA, leading to higher bank risk. Our study complements the understanding of bank liquidity management.