Abstract

This paper examines the link between bank liquidity and exposure to industry-level shocks. Using a unique dataset of borrower industry affiliations, we propose a new measure of industry-level shocks calculated at the bank level. We construct bank-specific loan portfolio weights for each industry and apply them to two industry-level indices. Our estimates reveal the negative link between bank liquidity and industry shocks. The sensitivity of liquidity to bank exposure is higher for more liquid, better capitalized, and smaller banks, which may be explained by their ability to displace funds, either for precautionary reasons or for loan financing.