Essays about the Liquidity Management and its Implications on the Performance of US Commercial Banks

This thesis examines the flexibility of U.S. commercial banks and their responses during the COVID-19 crisis by focusing on liquidity management and its implications on banks performance under financial pressures and regulatory constraints. The three empirical chapters provide new evidence on banks’ responses to the large deposit inflows, rising loans demand, and increased credit risk. Therefore, the Difference-in-Differences approach with fixed effects is used to isolate the effects of the main variables during the crisis and obtain the results.

The second chapter analyses how banks managed the simultaneous increase in deposits (TDD) during the pandemic through their borrowing from the Federal Reserve’s Discount Window (TLFDW). The results show that small treated banks reduced their borrowing during the crisis while the relationship became positive when high domestic deposits growth was taken into account. Medium-sized banks show no statistically significant change, whereas large treated banks increased their use of the Discount Window. These findings show that liquidity management differed according to bank size and funding conditions. In addition, they reflect the important role of liquidity facilities from the central bank.

The third chapter evaluates the effects of increased commercial and industrial (C&I) lending on profitability measured by net interest margin (NIM), return on assets (ROA), and return on equity (ROE). The clearest result appears among small treated banks with high C&I lending which experienced an improvement in net interest margin while the corresponding effects on return on assets and return on equity are not statistically significant. The positive relationship is also observed across the four U.S. regions. However, this positive relationship becomes even stronger for NIM when high deposits inflows are considered (which occurred at the onset of the pandemic).

The fourth chapter explores the relationship between loan loss provisions (LLPs) and capital adequacy ratios (CARs). The results show no statistically significant additional effect of high LLPs on CAR among small banks (Borrowers or Non-Borrowers). However, the most notable regional differences concentrated in the West for small banks. In addition, capital responses differed among other banks with different sizes based on their borrowing status from the Discount Window rather than the levels of loan loss provisions (LLPs). Thus, the absence of statistical significance in the main results might reveal or refer to the role of fiscal support and monetary interventions which might be one of other factors that mitigated the potential sharp erosion of capital in the short run during the crisis for these banks.

Overall, this thesis highlights the complexity of bank behaviour under systemic stress and the importance of bank size, funding conditions, government interventions, liquidity facilities and risk management in understanding banks’ responses during an exceptional economic shock.