Social Capital, Bank Liquidity Holdings and Bank Failure Risk

This research examines whether social capital at the county level in the U.S., as captured by the strength of civic norms and density of social networks, affects the liquidity holdings and failure risk of banks headquartered in the counties. Findings here indicate that banks headquartered in counties with higher levels of social capital exhibit lower precautionary demand for liquidity holdings and lower probability of failure. Further analysis reveals that the effects of social capital on liquidity holdings and failure risk are more pronounced for small banks than large banks. In addition findings show that the relationship between bank liquidity risk and/or credit risk and liquidity holdings is less (more) pronounced for banks headquartered in the high (low) social capital counties. These results suggest that social capital plays an important role in reducing liquidity holdings by banks and mitigating bank failure risk