Can banks maintain their advantage as liquidity providers when they are heavily exposed to a financial crisis? The … liquidity insurer is not one of the passive recipient, but of an active seeker, of deposits. We find that banks facing a funding … liquidity demand shocks (as measured by their unused commitments, wholesale funding dependence, and limited liquid assets), as …

-sale prices make it attractive for banks to hold liquid assets. We show that the resulting choice of bank liquidity is counter … crises may be desirable ex post. However, policies aimed at resolving crises affect ex-ante bank liquidity in subtle ways …: while liquidity support to failed banks or unconditional support to surviving banks in acquiring failed banks give banks …

We propose and test a theory of corporate liquidity management in which credit lines provided by banks to firms are a … form of monitored liquidity insurance. Bank monitoring and resulting credit line revocations help control illiquidity …-seeking behavior by firms. Firms with high liquidity risk are likely to use cash rather than credit lines for liquidity management …