Corporate Governance And Bank Liquidity Providing: An Option-Based Valuation

The literature on internal and external corporate governance in the money management industry tells us much about corporate governance. However, the massage on the mechanisms is far from complete. This paper examines the relationships among the quality of corporate governance, the capital-to-deposits ratio and the liquidity on demand provision. In the model where loans, loan commitments, and external financing need are the liquidity provision sources, changes in corporate governance or capital regulation have direct effects on bank liquidity. An increase in the high-quality of corporate governance, or in the capital-to-deposits ratio decreases the bank'optimal loan rate, and loan commitment rate with strategic complements when the bank stays in a more risky state of the world. An increase in the low-quality corporate governance or the capital-to-deposits ratio increases the bank's external financial needs. Our findings provide alternative mechanisms for the evidence concerning the bank liquidity provision with corporate governance and regulation.