Liquidity risk in banking has been attributed to transactions deposits and their potential to spark runs or panics. We show instead that transactions deposits help banks hedge liquidity risk from unused loan commitments. Bank stock-return volatility increases with unused commitments, but the...

This paper provides an economic explanation for the extraordinary and historically unprecedented accumulation of liquid assets by the banking system in the aftermath of the Great Depression. At the end of the decade (1938 to 1939) the banking system held over 35 percent of their assets in...