Working Papers in Responsible Banking & Finance Why Do Banks Hold Excess Cash ?

In light of the recent regulatory changes and the increase in cash reserves after the financial crisis of 2007-08, we examine the determinants of cash levels and the effects of excess cash on bank’s business policies, for both listed and unlisted banks. As for the determinants, we find that larger, more profitable, more capitalized, and more diversified banks hold less cash. As for bank’s policies (acquisition and security investments, lending), our evidence does not support the hypothesis that excess cash exacerbates agency problems. We also document the importance of the listing status for bank holding companies with liquidity risk being more severe for unlisted banks, which are more reliant on excess cash to finance investments. Overall, the evidence supports precautionary and strategic motives as main drivers of the relationship between business policy choices and excess cash for listed and unlisted banks, respectively. Finally, we find that the correlation between excess cash and investments, both in terms of acquisitions and securities, increases after the crisis. WP No 16-009