Host: Alberto Manconi

Abstract:

Non-financial corporations (NFCs) hold large cash balances, yet little is known about how this liquidity is deployed and whether it matters for bank funding. Using granular ECB administrative data linking firms and banks, we show that NFCs are major suppliers of unsecured wholesale funding, accounting for about 35% of euro-area market volume. On average, firms place roughly 24% of their cash in short-term bank instruments, partly financing these positions through borrowing and actively reallocating liquidity across banks. Exploiting quasi-natural experiments—the ECB’s 2022 rate hikes and the COVID-19 shock—we show that firms actively trade off liquidity and return while continuing to supply a stable source of funding during economy-wide disruptions. Our findings indicate that corporate cash holdings play an intermediation-like role, revealing a novel channel through which corporate liquidity management shapes bank funding.