Tehran Institute for Advanced Studies (TEIAS)

/ Local Recessions: Evidence from Bank Liquidity Squeezes __ Rajkamal Iyer


Local Recessions: Evidence from Bank Liquidity Squeezes

Raj Poster

May 17, 2023
(27 Ordibehesht, 1402)



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May 16, 2023

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Rajkamal Iyer

Associate Professor of Finance at Imperial College, London


This paper investigates the relation between bank liquidity and local business cycles. Our findings suggest that an increase in the dispersion of deposit rates offered by banks within a geographic area accurately predicts the onset of local recessions and the severity of the downturn over long time horizons. As a region heads to a recession, deposit growth slows down and banks differentially increase deposit rates to support their balance sheet. The increased dispersion of deposit rates reflects the liquidity squeeze faced by banks as a result of deteriorating economic conditions, in turn, signaling an oncoming recession. Our results hold important policy implications.


Rajkamal Iyer

Rajkamal Iyer is a professor of finance at Imperial College, London. Prior to that Raj was a professor of Finance at the MIT Sloan School of Management. Raj’s research focuses on the area of banking and financial intermediation, with a particular interest in understanding the role of banks in society. Raj also holds a research advisory role at the Bundesbank. Raj’s work has been published in leading academic journals and several central banks have drawn on his expertise for policy making. He holds a BA and an MA in economics from Bombay University, an MSc in economics and finance from the London School of Economics, and a PhD in finance from INSEAD.