Title: Determinants of bank customers' demand for liquidity: the effect of bank capital and customers' characteristics

Authors: Cláudia D. Bernardo; Sérgio C. Lagoa; Emanuel R. Leão

Addresses: Banco SantanderTotta SA, Rua do Ouro 88, 1100-063 Lisboa, Portugal ' Instituto Universitário de Lisboa (ISCTE-IUL), Department of Political Economics and DINAMIA'CET-IUL, Avenida das Forças Armadas, 1649-026 Lisboa, Portugal ' Instituto Universitário de Lisboa (ISCTE-IUL), Department of Political Economics and DINAMIA'CET-IUL, Avenida das Forças Armadas, 1649-026 Lisboa, Portugal

Abstract: In contexts of economic instability, investors show an increase in risk aversion and prefer high liquidity and low-risk financial products. In this paper, we study the reasons behind bank customers holding wealth in the form of immediate liquidity. Using micro data on clients' portfolios of a Portuguese bank, we ask whether there is a relationship between bank's capital ratio and the proportion of wealth that clients allocate to demand deposits, which is a relatively unexplored topic in the literature. Special attention is also paid to the impact of investors' financial knowledge regarding portfolio decisions by looking at university education, professional group and age. Results indicate that when banks' capital ratio decreases, savers put a larger fraction of their investment into demand deposits, especially savers with greater risk aversion and knowledge. Finally, we find evidence that investors with a university education or belonging to professional groups with higher skills follow more sophisticated investment strategies.

Keywords: financial institutions; liquidity demand; financial literacy; capital ratio; banking industry; deposits; investor behaviour; crisis; Portugal; determinants; bank customers; bank capital; customer characteristics; economic instability; risk aversion; portfolio decisions; university education; professional group; age; investment strategies.

DOI: 10.1504/IJMEF.2015.072334

International Journal of Monetary Economics and Finance, 2015 Vol.8 No.3, pp.242 - 264

Received: 25 Jul 2014
Accepted: 04 Mar 2015
Published online: 09 Oct 2015 *

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