Double Bank Runs and Liquidity Risk Management

Filippo Ippolito, José-Luis Peydró, Andrea Polo, Enrico Sette

Abstract

Banks provide liquidity to depositors and to credit-line borrowers, and are thus exposed to double runs. We identify this risk by exploiting the European interbank market freeze in August 2007 and the comprehensive Italian Credit Register. After the interbank shock, firms with multiple credit lines draw down especially from more affected banks, measured by higher precrisis interbank funding. This effect is not driven by different loan prices, is stronger for financially constrained firms and banks, and comes from the fear (confirmed ex-post) of a cut in granting new loan applications by banks with high interbank exposure. However, there are no double runs at the aggregate bank-level or credit-line runs at the loan-level, unless we control for firm selection (fixed effects or observables), which implies that banks with higher interbank funding do not suffer larger overall credit-line drawdowns. This is the result of ex-ante liquidity risk management, whereby more liability-fragile banks in the period before the crisis extend less credit lines to firms that draw more in crisis times.