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 PA LG R AV E M AC M I L L A N S T U D I E S I N
BANKING AND FINANCIAL INSTITUTIONS
S E R I E S E D I TO R : P H I L I P M O LY N E U X

Bank Liquidity and the

Global Financial Crisis
The Causes and Implications
of Regulatory Reform

Laura Chiaramonte
Palgrave Macmillan Studies in Banking
and Financial Institutions

Series Editor
Philip Molyneux
University of Sharjah
Sharjah, United Arab Emirates
The Palgrave Macmillan Studies in Banking and Financial Institutions
series is international in orientation and includes studies of banking sys-
tems in particular countries or regions as well as contemporary themes
such as Islamic Banking, Financial Exclusion, Mergers and Acquisitions,
Risk Management, and IT in Banking. The books focus on research and
practice and include up to date and innovative studies that cover issues
which impact banking systems globally.

More information about this series at

http://www.palgrave.com/gp/series/14678
 Laura Chiaramonte

Bank Liquidity
and the Global
Financial Crisis
The Causes and Implications
of Regulatory Reform
Laura Chiaramonte
Department of Economics and
Business Administration, Faculty of
Economics
Università Cattolica del Sacro Cuore
Milan, Italy

Palgrave Macmillan Studies in Banking and Financial Institutions

ISSN 2523-336X ISSN 2523-3378 (electronic)
ISBN 978-3-319-94399-2 ISBN 978-3-319-94400-5 (eBook)
https://doi.org/10.1007/978-3-319-94400-5

Library of Congress Control Number: 2018946155

© The Editor(s) (if applicable) and The Author(s) 2018

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The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland
To the members of my family to whom I owe everything: my mother Luciana,
my father Tullio, and my husband Andrea. They are the ones who taught me
to trust that the dots would somehow connect in my future.
 Foreword

The subprime crisis, originating in the US real estate financing sector,

highlighted the significant interconnections between financial systems
and markets and the underlying fragility of many important banking
intermediation sectors (investment banking, specialist financing, inter-
national financial activity). It also highlighted one of the types of bank-
ing crisis less frequent in the financial history and, in some ways, less
investigated and known: the liquidity crisis. Traditionally associated with
rare events and investigated mainly in its final and most evident mani-
festation (a bank run), often involving non-primary subjects and cases
of embezzlement, falsification or contextual factors deranging normal
management dynamics and utterly undermining investor confidence, in
this instance the liquidity crisis had very different characteristics. It rap-
idly became a global phenomenon, sweeping through leading financial
systems, starting with the most dynamic and innovative, and had lasting
consequences on the functioning of financial mechanisms and markets.
The crisis hit institutions of different nature and size, including massive
international banks, requiring large-scale public intervention via, among
other things, substantial and prolonged liquidity injections into the mar-
kets by central banks.
From the point of view of banking management, in a framework of
financial innovation and globalization, the crisis revealed the deep and
complex relationship between the quality of assets and banking liquidity,
as well as the intrinsic risk of banks taking on high levels of leverage and

vii
viii    Foreword

adopting innovative, but potentially unstable business models (such as

the Originate To Distribute model, OTD).
From the point of view of the financial markets—in all their ramifi-
cations—the crisis sharply highlighted one of the most unpleasant con-
sequences of globalization and computerized transactions: the massively
increased sensitivity of operators of all kinds and the spread of unidirec-
tional tendencies that are hard to counteract (a market run) and far more
dangerous than ‘traditional’ bank runs.
In terms of banking and financial supervision, the crisis demon-
strated the limited overall effectiveness of the regulatory framework,
the limitations of the independence of supervisory authorities, and sig-
nificant shortcomings in coordination between supervisors at the inter-
national level. These negative or limiting aspects also applied to the
regulations and restrictions designed to control liquidity risks in banks.
Unsurprisingly, later on, after a profound rethinking of the overall
approach to banking and financial supervision, for the first time liquidity
risk came to occupy a central position, shaping the most recent version of
the Basel Accords (Basel III), with the introduction of two coefficients:
the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio
(NSFR). In addition, principles for the proper supervision and man-
agement of liquidity risk were established along with related monitor-
ing tools. In other words, liquidity risk and liquidity crises became the
main focus, with a primary role both in banking policies and supervisory
action.
Laura Chiaramonte’s book explores this crucial function of bank-
ing and financial activity in a complete and deep way, in terms of both
the size of markets, supervisory and control policies, and the manage-
ment equilibrium of intermediaries. Specifically, it analyzes the nature
and characteristics of ‘bank liquidity’ phenomenon in multidimensional
terms, (i.e. from the point of view of central banks, markets and inter-
mediaries), the causes, implications and consequences of liquidity crises
in light of recent experience; the relationship between liquidity crises and
bank insolvencies; the role of central banks in the regulation of the inter-
bank market and to support the credit system; and the implications of
liquidity risk management in banks.
The work ends with an in-depth analysis of the new Liquidity
Regulatory Framework of Basel III, the potential implementation strat-
egies by banks and the consequences of regulation in terms of costs and
benefits.
 Foreword    ix

Overall, the book provides a broad, closely argued and up-to-date

examination of banking liquidity management that, in the post-globaliza-
tion world, significantly impacted the overall stability of banking systems,
the functioning of financial markets and, ultimately, the development
prospects of the economy as a whole. This will be of relevant interest to
academics and practitioners who want to understand what happened and
the resulting changes and trends in the management and market envi-
ronment.

University of Verona, Italy Roberto Bottiglia

Roberto Bottiglia is Full Professor in Banking and Finance at the

University of Verona—Italy, where he teaches Bank Management. He
graduated in Business Administration from the Bocconi University of
Milan. Research topics include agricultural credit, financial marketing, IT
in banking, the structure of financial systems and banks’strategies, and
the crisis of the major banking groups in Europe and the USA.
 Contents

1 Introduction 1

2 The Concept of Bank Liquidity and Its Risk 5

2.1 Definition of Bank Liquidity 5
2.2 Liquidity Risk: Definition and Multidimensionality 9
2.3 Liquidity Interconnections in Normal and Turbulent
Periods 20
2.4 The Linkages Between Liquidity and Solvency 25
2.5 The Relationships Between Liquidity Risk and Other
Typical Bank Risks 27
2.6 The Aggravating Factors of Liquidity Risk 28
References 31

3 The Bank Liquidity Issues During the Subprime Crisis 35

3.1 The Subprime Crisis 35
3.2 Bank Liquidity Problems During the Subprime Crisis 43
3.3 Liquidity Crises: Common Features and Some
Prevention and Management Policies 50
References 57

xi
xii    Contents

4 The Role of Central Banks and the Interbank Market

in Managing Bank Liquidity During the Global Financial
Crisis 63
4.1 Central Banks, the Interbank Market and Bank Liquidity
Management 63
4.2 The Liquidity Management Instruments of Leading
Central Banks 66
4.3 The Monetary Policy Actions Used by Leading Central
Banks in Response to the GFC 71
4.4 The Role of the Interbank Market in Financial Crises:
Theories and Empirical Evidence 82
4.5 The Functioning of the Interbank Market During the
Financial Crisis 90
References 95

5 Bank Liquidity Regulation Before the Global Financial

Crisis 99
5.1 Liquidity Risk Management: Regulation Before the
Financial Crisis 99
5.2 The Building Blocks of the Liquidity Risk Management
Process 102
5.3 The Role of the Supervisors 124
References 128

6 The New International Liquidity Regulatory

Framework for Banks 131
6.1 Liquidity Risk: Regulatory Issues 131
6.2 Common Principles for Sound Liquidity Management
and Supervision 132
6.3 The Minimum Liquidity Standards of Basel III 135
6.4 Monitoring Tools to Assess Liquidity Risk 160
References 165

7 The Implications of Basel III Liquidity Regulatory

Reform 167
7.1 Introduction 167
7.2 Possible Strategies for Banks to Meet Basel III Liquidity
Ratios: Costs and Benefits 167
 Contents    xiii

7.3 An Empirical Literature Review of the Impact of the

Liquidity Requirements on Bank Behaviour 172
7.4 Bank Compliance with Basel III Liquidity Ratios:
An Overview of Quantitative Impact Studies 178
References 187

8 Conclusion 189
Reference 191

Index 193
 About the Author

Laura Chiaramonte is Associate Professor in Banking and Finance

at Università Cattolica del Sacro Cuore of Milan, Italy. She gained her
Bachelor’s in Business Economics and Ph.D. in Business Administration
from the University of Verona, Italy. Her main research includes the
role of bank credit default swaps (CDSs) in the financial crisis of 2007–
2009, the role of cooperative banks in promoting bank stability, the
reliability of the Z-score in predicting bank failure, and the role of the
Basel III capital and liquidity ratios in reducing bank distress phenom-
ena. Her research has been published in journals, such as The European
Journal of Finance, The British Accounting Review, European Financial
Management, and Financial Markets, Institutions and Instruments.

xv
 Acronyms and Abbreviations

ABSs Asset Backed Securities

AIG American International Group
ALCO Asset and Liability COmmittee
ALM Asset and Liability Management
APP Asset Purchase Program
ASF Available Stable Funding
BCBS Basel Committee on Banking Supervision
BIS Bank for International Settlements
CBPP Covered Bonds Purchase Program
CC Counterbalancing Capacity
CCP Cash Capital Position
CDOs Collateralized Debt Obligations
CDSs Credit Default Swaps
CEBS Committee of European Banking Supervisors
CFP Contingency Funding Plan
CLGs Cumulative Liquidity Gaps
CP Commercial paper
CPFF Commercial Paper Funding Facility
CPSS Committee on Payment and Settlement Systems
DLCR Dutch Liquidity Coverage Ratio
DNB Dutch National Bank
DSGE Dynamic Stochastic General Equilibrium
DVP Delivery versus Payment
EBA European Banking Authority
ECAI External Credit Assessment Institution
ECB European Central Bank

xvii
xviii    Acronyms and Abbreviations

EFSM European Financial Stability Mechanism

FED Federal Reserve
FOMC Federal Open Market Committee
FSA Financial Service Authority
FSB Financial Stability Board
FSF Financial Stability Forum
FTP Funds Transfer Pricing
GDP Gross Domestic Product
GFC Global Financial Crisis
HQLA High Quality Liquid Assets
IAS International Accounting Standards
IFRS International Financial Reporting Standards
IIF International Institute of Finance
ILG Individual Liquidity Guidance
IMF International Monetary Fund
LB Liquidity Buffer
LCR Liquidity Coverage Ratio
LTCM Long Term Capital Management
LTD Loan To Deposit ratio
LTROs Long-Term Refinancing Operations
LTV Loan-to-value ratio
M&As Merger and Acquisitions
MBSs Mortgage Backed Securities
MLG Marginal Liquidity Gaps
MMFs Money Market Funds
NSFR Net Stable Funding Ratio
OBS Off-balance sheet
ODR Official Discount Rate
OIS Overnight Indexed Swap
OMTs Outright Monetary Transactions
OTC Over The Counter
OTD Originate To Distribute
OTH Originate To Hold
PSEs Public Sector Entities
PSS Payment and Settlement Systems
PVP Payment versus Payment
QIS Quantitative Impact Studies
Repos Repurchase agreements
RFQ Request for quote
RMBS Residential Mortgage Backed Securities
ROA Return on assets
ROE Return on equity
 Acronyms and Abbreviations    xix

RSF Required Stable Funding

RTGS Real Time Gross Settlements
SIFIs Systemically Important Financial Institutions
SIV Structured Investment Vehicle
SLR Structural Liquidity Ratio
SMEs Small- and Medium-sized Enterprises
SMP Securities Markets Program
SPV Special Pourpose Vehicle
SRR Special Resolution Regime
TLTROs Targeted Long-Term Refinancing Operations
UK United Kingdom
US United States
VRDNs Variable rate demand notes
 List of Figures

Fig. 3.1 The functioning of the innovative securitization process

(simplified) 38
Fig. 3.2 Main effects of the US restrictive monetary policy adopted
in 2006 42
Fig. 3.3 Balance sheet characteristics of the US banks most affected
by liquidity problems 44
Fig. 3.4 Relationship between liquidity, solvency, and bank stability 47
Fig. 7.1 LCR and NSFR over time (in %) 181
Fig. 7.2 LCR and NSFR for Group 1 banks by region (in %) 181
Fig. 7.3 Components of LCR by sub-sample banks (in %) 183
Fig. 7.4 Components of LCR for Group 1 banks by region (in %) 184
Fig. 7.5 Components of NSFR by sub-sample banks (in %) 185
Fig. 7.6 Components of NSFR for Group 1 banks by region (in %) 186

xxi
 List of Tables

Table 6.1 The timetable of the introduction of the LCR 139

Table 6.2 HQLA categories 141
Table 6.3 Total cash outflows calculation in LCR 146
Table 6.4 Total cash inflows calculation in LCR 150
Table 6.5 ASF calculation in NSFR 154
Table 6.6 RSF calculation in NSFR 156
Table 6.7 OBS categories in NSFR 160
Table 7.1 Sample of participating banks by country 179

xxiii
 CHAPTER 1

Introduction

The Global Financial Crisis (GFC), originated in 2007 from United

States (US) subprime mortgage loans, brought to the attention of regu-
lators the issue of bank liquidity and its efficient management in ensuring
bank stability. Until then, liquidity risk was underestimated by prudential
regulation, since it was thought that illiquidity problems did not jeop-
ardize bank stability and consequently the financial system as a whole.
Both with Basel I (1988) and with Basel II (2004) Accords, regulators
required banks only to comply with international capital requirements.
Liquidity risk was managed by non-harmonized and very different proce-
dures between countries, based on rigid rules that were partly inadequate
given the degree of market sophistication.
However, between 2007 and 2009, many banks, particularly large
institutions in nodal positions in the network of interbank and inter-
financial relations, not only American, but also European banks, through
accentuated market integration, suffered liquidity shocks due to the
difficulty of finding alternative sources of funding, the lack of credi-
tor confidence and the immediate need to rebuild liquidity reserves.
In relation to the latter, their actions further aggravated financial insta-
bility and systemic liquidity strains. They sought to obtain liquidity by
selling financial assets, with significant decreases in their value, revoking
credit positions on both the interbank market and with other financial
institutions (wholesale funding). This had two serious effects: on the
one hand, the impact of the losses on bank equity (demonstrating the

© The Author(s) 2018 1

L. Chiaramonte, Bank Liquidity and the Global Financial Crisis,
Palgrave Macmillan Studies in Banking and Financial Institutions,
https://doi.org/10.1007/978-3-319-94400-5_1
2 L. CHIARAMONTE

connection between liquidity risk and capital equilibrium) and, on the

other, the interruption of trading on the interbank market, which ceased
to function as a liquidity exchange. In this context, the failure of Lehman
Brothers (in September 2008), set off a systemic liquidity crisis through-
out 2009, followed by extraordinary and urgent interventions from cen-
tral banks all over the world aimed at stabilizing and preventing banking
crises through significant capital and liquidity injections.
In this context, in 2010, the Basel Committee on Banking
Supervision (BCBS) proposed a revision of the regulatory framework at
international level to strengthen banks and banking systems. The new
regulation, the Basel III Accord, introduced two liquidity indicators
for banks: the Liquidity Coverage Ratio (LCR), which came into effect
gradually after 2015 and set out to ensure the survival of banks for one
month in even acute stress; and the Net Stable Funding Ratio (NSFR),
which came into effect in 2018 and aims to avoid structural imbalances
in the maturity composition of liabilities and assets over a period of
one year.
Although Basel III liquidity rules are geared to ensuring greater bank-
ing system stability, they may change the functioning of banks, their
profitability, their capacity to lend to the real economy, and so their rela-
tionship with the market. In view of this, the aim of this book is to pro-
vide a comprehensive understanding of the bank liquidity crisis during
the GFC, of the liquidity regulatory reform introduced by Basel III, and
its micro and macroeconomic implications.
The book is organised as follow. Chapter 2 provides a discussion of
the concept of bank liquidity and its related risk, distinguishing between
three different liquidity (risk) types: central bank liquidity (risk), fund-
ing and market liquidity (risk). This chapter continues with an analysis
of liquidity (risk) interconnections and their impact on financial stabil-
ity in various scenarios: periods of normality or turbulence, underlining
the role of central banks as an immediate, but temporary instrument in
managing a liquidity crisis. In light of the strong interlinking of financial
and capital equilibrium (underestimated as the GFC of 2007–2009 made
clear), the chapter clarifies the linkage between liquidity and solvency,
two related but non interchangeable concepts. The difference between
the two terms is fundamental because policy actions to address an insol-
vency or liquidity crisis vary dramatically and assessing the underlying
problems of banks is therefore crucial.
 1 INTRODUCTION 3

This chapter then gives on an overview of the bidirectional relation-

ships of liquidity risk with other risks and the circular pattern of cause-
effect. It ends with the description of the factors that over time aggra-
vated the liquidity risk and its management.
Chapter 3 focuses on the banking liquidity crisis of 2007–2009, inves-
tigating the origin and causes of the crisis originating with US subprime
mortgage loans. It moves on to discuss the emergence of bank liquid-
ity problems during the GFC, analyzing the characteristics of the banks
most affected by the liquidity crisis and the type of liquidity problems
they faced. It explains how the liquidity crisis turned into a solvency crisis
for financial institutions, undermining banking stability. It points to the
lessons that can be learned from the GFC, particularly with regard to
liquidity risk.
The third chapter ends with an overview of leading studies into the
nature of liquidity crises and the policies designed to prevent and man-
age them, including the importance of the role of central banks and the
interbank market in bank liquidity management.
Chapter 4 therefore analyses the link between monetary policy and
the management of bank liquidity, firstly focusing on the operating
framework of the three main central banks involved in the crisis (the
European Central Bank—ECB, the Federal Reserve—FED, and the
Bank of England) and the adoption of exceptional instruments put in
place to deal with the crisis. Then the chapter reviews the main theo-
retical contributions related to the role of the interbank market in the
transmission of financial crises, examining the functioning of this market
during the GFC.
Chapters 5 and 6 shift the focus to bank liquidity regulation. The
GFC demonstrated how regulators at the international level had failed to
set up homogeneous rules of conduct for banks in terms of liquidity risk
management, left to the broad discretion of individual national super-
visory authorities. The two chapters examine bank liquidity regulations
before and after the GFC. Specifically, Chapter 5 focuses on the Basel I
Accord (1988) and the failure of the BCBS to envisage banking liquidity
risk. Only in 1992 did the BCBS address the problem of ensuring min-
imum standards for managing liquidity risk in international banks; how-
ever, it limited itself to a report setting out the best practices to measure
and manage this risk. The Basel II Accord (2004), and in particular its
second pillar, introduced a qualitative supervisory model, but left indi-
vidual national regulators to consider further measures to monitor and
4 L. CHIARAMONTE

prevent banking illiquidity. The third pillar, relating to disclosure, is also

discussed; here, Basel II gave broad discretion to national supervisors in
relation to the need to oblige banks to disclose their exposure to, and
management of, liquidity risk. Chapter 5 gives ample space to both the
aims pursued by liquidity risk management and its main components.
It concludes with an analysis of the supervisors’ role in liquidity risk
management.
Providing a thorough analysis of the new liquidity regulation,
Chapter 6 initially focuses on the principles for sound liquidity manage-
ment and supervision (the so-called Sound Principles) defined by the
Basel Committee in September 2008 and then on the content of the
Basel III Accord of 2010 (and its subsequent amendments). With ref-
erence to the latter, the chapter describes the two minimum liquidity
standards for banks, the LCR and NSFR, and then gives an overview of
liquidity and monitoring tools designed to strengthen and further pro-
mote global consistency in the supervision of liquidity risk.
The seventh chapter reviews the results of the existing empirical stud-
ies and analyses the implications of the Basel III liquidity requirements
both at the individual bank (microeconomic) level and market (macroe-
conomic) level. It also looks at the results of Quantitative Impact Studies
(QIS) carried out by the BCBS on a representative sample of banks in
order to draw some preliminary considerations on the ability of banks to
adapt to the new Basel III liquidity ratios and the strategies adopted to
comply with the LCR and the NSFR, highlighting the potential differ-
ences between the geographical areas considered.
Finally, Chapter 8 concludes the book underlining the importance of
keeping the liquidity risk well monitored in the future.
 CHAPTER 2

The Concept of Bank Liquidity and Its Risk

2.1  Definition of Bank Liquidity

During the Global Financial Crisis (GFC) which began in the United
States (US) in late 2007, albeit with relatively high capital levels, many
banks faced difficulties because they had failed to manage liquidity prop-
erly. These events highlighted the importance of liquidity in the func-
tioning of the banking sector and spurred regulators and policy makers
to pay special attention to liquidity and its risk management in the bank-
ing industry (Vento and La Ganga 2009).1 This interest became urgent
during the GFC because the liquidity shortfall in one bank was able to
infect and destabilize the entire financial system, since a collapse in confi-
dence in one institution was likely to spread to all others seen as exposed
to the same or similar problems. Therefore, studying and understanding
liquidity is a very important topic, especially for banks, given that they
act as liquidity providers and financial intermediaries in the financial
system. However, understanding the term liquidity is an arduous task,
fraught with ambiguity due to multiple facets and definitions (Goodhart
2008). Indeed, it has been said that ‘liquidity is easier to recognize than
define’ (Crockett 2008) and is an elusive concept. For example, in the
economic literature the notion of liquidity is related to the ability of an
economic agent to exchange his or her existing wealth for goods and ser-
vices or other assets (Williamson 2008). In this definition, two features
come to the fore. First, liquidity can be understood as a flow concept

© The Author(s) 2018 5

L. Chiaramonte, Bank Liquidity and the Global Financial Crisis,
Palgrave Macmillan Studies in Banking and Financial Institutions,
https://doi.org/10.1007/978-3-319-94400-5_2
6 L. CHIARAMONTE

and not as stock. Second, liquidity is linked to the ability to carry out
these flows. Failure to do so would render the financial entity illiquid.
Therefore, in this framework, liquidity refers to a set of flows exchanged
among agents of the financial system, in particular between banks, the
central bank and markets. Consequently, within the financial system
three broad types of liquidity exist: central bank liquidity, funding liquid-
ity and market liquidity (Nikolaou 2009).2 As explained in the following
sections, the first is related to the liquidity provided by a central bank,
the second to the ability of banks to fund their positions, and the third
to the ability to trade in the markets.

2.1.1   Central Bank Liquidity

The ability of the central bank to supply the liquidity needed to the
financial system is the first type of liquidity, so-called central bank
­liquidity. Generally, it is calculated as the flow of monetary base sup-
plied to the financial system from the central bank. Thus, it refers to
central bank liquidity operations, which consist in the amount of liquid-
ity provided to the money market through the actions of the central
bank, in line with the monetary policy stance. The latter reflects the
prevailing value of the operational target, i.e. the control variables of
the central bank. In practice, the central bank strategy determines the
monetary policy stance, consisting in setting the operational target level
(usually the key policy rate). To implement this target, the central bank
manages its monetary policy instruments, i.e. open market operations,3
to influence liquidity in the money markets so the interbank rate stays
in line with the operational target rate defined by the prevailing mone-
tary policy stance. Thereby, the central bank, as the monopoly provider
of the monetary base, through its open market operations, provides
liquidity to the financial system. In practical terms, together with loans
to banks and investments in government securities, these operations are
shown on the assets side of the central bank’s balance sheet against lia-
bilities comprising the sum of autonomous factors (including banknotes
in circulation, government deposits, net foreign assets, and other net
factors) with the reserves (i.e. the minimum balances that banks must
hold in the central bank). Thus, the definition of central bank liquidity
refers to its assets side, and particularly to the open market operations
used by the central bank to expand or contract the amount of money in
the banking system.
 2 THE CONCEPT OF BANK LIQUIDITY AND ITS RISK 7

To conclude, in the normal course of business, the central bank

­ rovides liquidity to the market to smoothen fluctuations, seasonal or
p
otherwise, and functions as the lender of last resort, providing credit to
solvent banks when no one else will.

2.1.2   Funding Liquidity

The Basel Committee on Banking Supervision (BCBS)4 defines the sec-
ond type of liquidity, funding liquidity, as the ability of banks to meet their
liabilities, unwind or settle their positions as they fall due (BCBS 2008).
The definition used by the International Monetary Fund (IMF) is very
similar: funding liquidity consists in the ability of solvent institutions to
make agreed-upon payments in a timely fashion (IMF 2008). Drehmann
and Nikolaou (2010) are in line with these definitions, given that they
argue that funding liquidity is the ability to settle obligations with imme-
diacy, which means that a bank is illiquid if it is unable to settle its obli-
gations on time. For them, funding liquidity is a flow concept. More
specifically, they argued that an entity is considered to have sufficient fund-
ing liquidity and hence is liquid as long as inflows are larger than, or at
least equal to, outflows. Thus, banks (but also firms, investors and traders)
are considered liquid if their cash outflows are less than or equal to the
cash inflows and stock of money held.
References to funding liquidity have also been made from the point of
view of traders (Brunnemeier and Pedersen 2009) or investors (Strahan
2008), where funding liquidity is related to their ability to raise funds
(capital or cash) at short notice. However, here, the attention is focused
on the funding liquidity of banks, given their importance in distributing
liquidity to the financial system (Nikolaou 2009).
Specifically, banks must ensure adequate liquidity at all times. In
determining the amount of potential liquidity that banks have to hold
to guarantee their day-to-day obligations, they need to do a number of
things, including (Sekoni 2015):

• ensure the availability of sufficient cash at customer outlets to meet

withdrawals;
• maintain sufficient settlement account balances to meet overnight
settlements;
• predict the likelihood of future net withdrawals and cash inflows
based on maturing deposits, loan drawdowns, customer transactions
and so on.
8 L. CHIARAMONTE

However, the nature of banking requires investments characterized by

assets with different degrees of liquidity (Vento and La Ganga 2009).
Consequently, banks are vulnerable to the sudden and unexpected
demand for funds by their customers and the inability to honour these
requests due to liquidity problems can have serious negative implications
for the entire financial system. Therefore, to avoid this kind of scenario,
it is useful to consider the different potential sources of funding liquidity
for banks, including, on the assets side:

• the asset market, where banks can go to sell their assets;

• the securitization market, where banks can generate liquidity by
securitizing existing loans;

and on the liabilities side:

• depositors, who give their money to the bank;

• bondholders, who can buy short and long-term debt instruments
issued by the bank;
• the interbank market, where banks exchange liquidity among
themselves;
• and finally, funding liquidity directly from the central bank.

All these funding channels work perfectly well in normal times, but in
a stress scenario, such as the GFC, they can become blocked, exposing
banks to a specific liquidity risk, so-called funding liquidity risk, which is
examined in Sect. 2.2.2.

2.1.3   Market Liquidity

Market liquidity, the third type, relates to the ability to trade in the mar-
kets. More specifically, it comprises the capacity to trade an asset in the
markets at short notice, at low cost and with little impact on its price
(Nikolaou 2009). Therefore, a market is considered liquid when it gives
investors (including banks) the opportunity to buy and sell a sizeable
amount of assets, such as securities, without appreciably affecting the
price of the asset.
The fact that any amount of assets can be sold at any time during
market hours, rapidly, with minimum loss of value and at competitive
prices is determined by the following four criteria (Bank for International
 2 THE CONCEPT OF BANK LIQUIDITY AND ITS RISK 9

Settlements–BIS 1999): immediacy, breadth (or tightness), depth, and

resilience. Immediacy is the time between launching and completing a
business transaction in the markets, hence the speed with which trades of
a certain size can be carried out. Breadth is the divergence in the price of
an asset from mid-market prices and is generally measured by the bid-of-
fer spread. Depth refers to either the volume of trades that can be car-
ried out without affecting current market prices or the amount of orders
on the order books of market-makers. Finally, resilience is the speed
with which price fluctuations during the execution of a trade return to
former levels.
A number of structural market factors ensure the availability of,
and increase in, liquidity in the market (David 2007; Caruana and
Kodres 2008), such as:

• the symmetrical distribution of information on asset values in the

market to potential buyers and sellers, and intermediaries;
• the availability of a large number of assets for trading compared to
the number of investors who want to trade;
• the presence of new and highly active market players that attract
fresh capital to the markets, increasing their liquidity;
• the introduction of technological advances able to lower trading
costs and increase transparency and price competition.

In the banking sector, two types of market liquidity are of paramount

importance: the liquidity of the interbank market, where banks can trade
liquidity among themselves, and liquidity in the asset market, where
assets are traded by financial agents, such as banks. These markets are
of fundamental importance for banks, because they are the main sources
of funding liquidity from the market. Illiquidity on these markets, such
as during the GFC, exposes banks that are over-dependent on the inter-
bank and asset markets to a specific liquidity risk, called market liquidity
risk (see Sect. 2.2.3), potentially undermining the stability of individual
banks and, in some cases, of the entire financial system.

2.2   Liquidity Risk: Definition and Multidimensionality

Liquidity risk is intrinsic to the banking business. Indeed, as said before,
the main role of banks in the financial system is to provide liquid-
ity through intermediation. More specifically, banks mediate between
10 L. CHIARAMONTE

depositors and investors, providing illiquidity loans to the latter, which

are funded with liquid deposits from the former. Thus, banks transform
short maturities (deposits) into longer maturities (investments) in order
to create funding liquidity for investors (Strahan 2008) and to contribute
to the efficient allocation of resources in the system. This mechanism is
called maturity transformation and means that the balance sheet of a bank
is typically characterized by illiquid long-term assets and liquid short-term
liabilities. This maturity mismatch can expose banks to liquidity risk and
cause bank instability in its role as provider of liquidity on demand to
depositors (through deposit transactions), or borrowers (through com-
mitted lines of credit). However, a high degree of maturity transforma-
tion can lead to liquidity problems for banks principally during periods
of stress when the confidence in the banking system tends to decrease.
Therefore, since it cannot be avoided, banks need to handle maturity
transformation properly. Banks can minimize their exposure to this risk
by holding enough liquid assets at any point (Montes-Negret 2009).
Nevertheless this is not the optimum strategy because liquid assets gen-
erate no returns (cash) or low/lower returns (investments in govern-
ment securities), given that they are without risk or carry low risk, unlike
longer-term (private) assets (such as loans and investments) which are
more illiquid and riskier, but yield higher returns. Banks, therefore, always
face a trade-off between holding (short-term) low-yield liquid assets
to use them as a liquidity cushion, or investing in less liquid but higher
return longer-term assets (Strahan 2008). During good times, such trade-
offs are often forgotten, but they rear their heads when the business cycle
turns or market disruptions make it more difficult and costly to tap sev-
eral potential sources of funding, including market funding sources (such
as interbank lines of credit), or attract or retain deposits. Clearly, there
are trade-offs between liquidity risk and bank profitability. Liquidity risk is
certainly a major consequential risk, as many failed banks have discovered,
but it is equally true that banks cannot afford to maintain enough excess
liquidity to survive every conceivable worst case scenario.
Focusing on the peculiarities of bank liquidity risk, it is important to
highlight its multidimensional nature. Indeed, it is usually analyzed in
the light of (Ruozi and Ferrari 2013):

• the origin of the risk (corporate liquidity risk vs. systemic liquidity risk);
• the timeframe of the risk analysis (short-term liquidity risk vs. struc-
tural liquidity risk);
 2 THE CONCEPT OF BANK LIQUIDITY AND ITS RISK 11

• the economic scenario of the risk (going concern liquidity risk vs.
contingency liquidity risk);
• the impact area of the liquidity risk (funding liquidity risk vs. market
liquidity risk).

In terms of origin, some factors can accentuate the exposure of a bank to

liquidity risk. They include technical factors, relating to some products
provided by banks to savers and enterprises that make the time profile of
their cash flows less certain and more unpredictable; specific or individual
factors relating to an individual bank; and factors of a systemic nature.
Technical factors are products that give counterparties (savers, enter-
prises, other banks) a high degree of discretion in determining future
cash flows. Typical examples are at sight liabilities, which often remain in
place for years, but can be withdrawn without notice; the personal guar-
antees provided by banks, which can be enforced merely at the request of
the creditor; and irrevocable credit lines granted to enterprises or special
vehicles created ad hoc for securitization purposes. Equally critical are
products, such as derivatives contracts traded on the Over The Counter
(OTC) markets, which require banks to pay guarantee margins that can
increase unexpectedly.
Bank liquidity risk can also increase due to specific factors and events
weakening the confidence of customers and operators in a specific bank,
prompting them to accelerate the recovery of loans (such as, withdraw-
ing at sight deposits or not renewing forward credit lines). For exam-
ple, rumours about the honesty of management and truthfulness of the
balance sheets, or the decision by one or more rating agencies to revise
down the rating of the bank are such events. With reference to the latter,
it should not be forgotten that often the funding that banks receive from
institutional counterparties contain automatic clauses (so-called triggers),
that specify repayment of the credit (or payment of substantial guaran-
tees) as an immediate consequence of a rating downgrade. Hence, all
these factors, weakening customers and operators confidence, are likely
to increase bank liquidity risk, causing funding difficulties.
The last group of factors rendering a liquidity risk more acute are
­systemic and can determine funding problems for banks and potential
difficulties in selling financial assets. They include events unrelated to the
situation of the individual bank, linked to a crisis in financial markets or
the economy or in politics, natural catastrophes, acts of terrorism, and so
on. A general crises of confidence can lead to a run on a country’s banks
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them striped and splashed and dotted with puttycolor and blue and
green of camouflage paint. A man in a motorboat waved his arms.
The men in khaki slickers huddled on the gray dripping deck of the
transport begin to sing
Oh the infantry, the infantry,
With the dirt behind their ears ...
Through the brightbeaded mist behind the low buildings of
Governors Island they can make out the tall pylons, the curving
cables, the airy lace of Brooklyn Bridge. Robertson pulls a package
out of his pocket and pitches it overboard.
“What was that?”
“Just my propho kit.... Wont need it no more.”
“How’s that?”
“Oh I’m goin to live clean an get a good job and maybe get
married.”
“I guess that’s not such a bad idear. I’m tired o playin round
myself. Jez somebody must a cleaned up good on them Shippin
Board boats.” “That’s where the dollar a year men get theirs I guess.”
“I’ll tell the world they do.”
Up forward they are singing
Oh she works in a jam factoree
And that may be all right ...
“Jez we’re goin up the East River Sarge. Where the devil do they
think they’re goin to land us?”
“God, I’d be willin to swim ashore myself. An just think of all the
guys been here all this time cleanin up on us.... Ten dollars a day
workin in a shipyard mind you ...”
“Hell Sarge we got the experience.”
“Experience ...”
Apres la guerre finee
 Back to the States for me....
“I bet the skipper’s been drinkin beaucoup highballs an thinks
Brooklyn’s Hoboken.”
“Well there’s Wall Street, bo.”
They are passing under Brooklyn Bridge. There is a humming
whine of electric trains over their heads, an occasional violet flash
from the wet rails. Behind them beyond barges tugboats carferries
the tall buildings, streaked white with whisps of steam and mist,
tower gray into sagged clouds.

Nobody said anything while they ate the soup. Mrs. Merivale sat
in black at the head of the oval table looking out through the half
drawn portières and the drawingroom window beyond at a column of
white smoke that uncoiled in the sunlight above the trainyards,
remembering her husband and how they had come years ago to look
at the apartment in the unfinished house that smelled of plaster and
paint. At last when she had finished her soup she roused herself and
said: “Well Jimmy, are you going back to newspaper work?”
“I guess so.”
“James has had three jobs offered him already. I think it’s
remarkable.”
“I guess I’ll go in with the Major though,” said James Merivale to
Ellen who sat next to him. “Major Goodyear you know, Cousin
Helena.... One of the Buffalo Goodyears. He’s head of the foreign
exchange department of the Banker’s Trust.... He says he can work
me up quickly. We were friends overseas.”
“That’ll be wonderful,” said Maisie in a cooing voice, “wont it
Jimmy?” She sat opposite slender and rosy in her black dress.
“He’s putting me up for Piping Rock,” went on Merivale.
“What’s that?”
 “Why Jimmy you must know.... I’m sure Cousin Helena has been
out there to tea many a time.”
“You know Jimps,” said Ellen with her eyes in her plate. “That’s
where Stan Emery’s father used to go every Sunday.”
“Oh did you know that unfortunate young man? That was a
horrible thing,” said Mrs. Merivale. “So many horrible things have
been happening these years.... I’d almost forgotten about it.”
“Yes I knew him,” said Ellen.
The leg of lamb came in accompanied by fried eggplant, late corn,
and sweet potatoes. “Do you know I think it is just terrible,” said Mrs.
Merivale when she had done carving, “the way you fellows wont tell
us any of your experiences over there.... Lots of them must have
been remarkably interesting. Jimmy I should think you’d write a book
about your experiences.”
“I have tried a few articles.”
“When are they coming out?”
“Nobody seems to want to print them.... You see I differ radically
in certain matters of opinion ...”
“Mrs. Merivale it’s years since I’ve eaten such delicious sweet
potatoes.... These taste like yams.”
“They are good.... It’s just the way I have them cooked.”
“Well it was a great war while it lasted,” said Merivale.
“Where were you Armistice night, Jimmy?”
“I was in Jerusalem with the Red Cross. Isn’t that absurd?”
“I was in Paris.”
“So was I,” said Ellen.
“And so you were over there too Helena? I’m going to call you
Helena eventually, so I might as well begin now.... Isn’t that
interesting? Did you and Jimmy meet over there?”
 “Oh no we were old friends.... But we were thrown together a
lot.... We were in the same department of the Red Cross—the
Publicity Department.”
“A real war romance,” chanted Mrs. Merivale. “Isn’t that
interesting?”

“Now fellers it’s this way,” shouted Joe O’Keefe, the sweat
breaking out on his red face. “Are we going to put over this bonus
proposition or aint we?... We fought for em didnt we, we cleaned up
the squareheads, didnt we? And now when we come home we get
the dirty end of the stick. No jobs.... Our girls have gone and married
other fellers.... Treat us like a bunch o dirty bums and loafers when
we ask for our just and legal and lawful compensation ... the bonus.
Are we goin to stand for it?... No. Are we goin to stand for a bunch of
politicians treatin us like we was goin round to the back door to ask
for a handout?... I ask you fellers....”
Feet stamped on the floor. “No.” “To hell wid em,” shouted
voices.... “Now I say to hell wid de politicians.... We’ll carry our
campaign to the country ... to the great big generous bighearted
American people we fought and bled and laid down our lives for.”
The long armory room roared with applause. The wounded men
in the front row banged the floor with their crutches. “Joey’s a good
guy,” said a man without arms to a man with one eye and an artificial
leg who sat beside him. “He is that Buddy.” While they were filing out
offering each other cigarettes, a man stood in the door calling out,
“Committee meeting, Committee on Bonus.”
The four of them sat round a table in the room the Colonel had
lent them. “Well fellers let’s have a cigar.” Joe hopped over to the
Colonel’s desk and brought out four Romeo and Juliets. “He’ll never
miss em.”
“Some little grafter I’ll say,” said Sid Garnett stretching out his long
legs.
 “Havent got a case of Scotch in there, have you Joey?” said Bill
Dougan.
“Naw I’m not drinkin myself jus for the moment.”
“I know where you kin get guaranteed Haig and Haig,” put in
Segal cockily—“before the war stuff for six dollars a quart.”
“An where are we goin to get the six dollars for crissake?”
“Now look here fellers,” said Joe, sitting on the edge of the table,
“let’s get down to brass tacks.... What we’ve got to do is raise a fund
from the gang and anywhere else we can.... Are we agreed about
that?”
“Sure we are, you tell em,” said Dougan.
“I know lot of old fellers even, thinks the boys are gettin a raw
deal.... We’ll call it the Brooklyn Bonus Agitation Committee
associated with the Sheamus O’Rielly Post of the A. L.... No use doin
anythin unless you do it up right.... Now are yous guys wid me or aint
yer?”
“Sure we are Joey.... You tell em an we’ll mark time.”
“Well Dougan’s got to be president cause he’s the best lookin.”
Dougan went crimson and began to stammer.
“Oh you seabeach Apollo,” jeered Garnett.
“And I think I can do best as treasurer because I’ve had more
experience.”
“Cause you’re the crookedest you mean,” said Segal under his
breath.
Joe stuck out his jaw. “Look here Segal are you wid us or aint
yer? You’d better come right out wid it now if you’re not.”
“Sure, cut de comedy,” said Dougan. “Joey’s de guy to put dis ting
trough an you know it.... Cut de comedy.... If you dont like it you kin
git out.”
 Segal rubbed his thin hooked nose. “I was juss jokin gents, I didn’t
mean no harm.”
“Look here,” went on Joe angrily, “what do you think I’m givin up
my time for?... Why I turned down fifty dollars a week only yesterday,
aint that so, Sid? You seen me talkin to de guy.”
“Sure I did Joey.”
“Oh pipe down fellers,” said Segal. “I was just stringin Joey
along.”
“Well I think Segal you ought to be secretary, cause you know
about office work....”
“Office work?”
“Sure,” said Joe puffing his chest out. “We’re goin to have desk
space in the office of a guy I know.... It’s all fixed. He’s goin to let us
have it free till we get a start. An we’re goin to have office stationery.
Cant get nowhere in this world without presentin things right.”
“An where do I come in?” asked Sid Garnett.
“You’re the committee, you big stiff.”
After the meeting Joe O’Keefe walked whistling down Atlantic
Avenue. It was a crisp night; he was walking on springs. There was a
light in Dr. Gordon’s office. He rang. A whitefaced man in a white
jacket opened the door.
“Hello Doc.”
“Is that you O’Keefe? Come on in my boy.” Something in the
doctor’s voice clutched like a cold hand at his spine.
“Well did your test come out all right doc?”
“All right ... positive all right.”
“Christ.”
“Dont worry too much about it, my boy, we’ll fix you up in a few
months.”
“Months.”
 “Why at a conservative estimate fiftyfive percent of the people you
meet on the street have a syphilitic taint.”
“It’s not as if I’d been a damn fool. I was careful over there.”
“Inevitable in wartime....”
“Now I wish I’d let loose.... Oh the chances I passed up.”
The doctor laughed. “You probably wont even have any
symptoms.... It’s just a question of injections. I’ll have you sound as a
dollar in no time.... Do you want to take a shot now? I’ve got it all
ready.”
O’Keefe’s hands went cold. “Well I guess so,” he forced a laugh. “I
guess I’ll be a goddam thermometer by the time you’re through with
me.” The doctor laughed creakily. “Full up of arsenic and mercury
eh.... That’s it.”
The wind was blowing up colder. His teeth were chattering.
Through the rasping castiron night he walked home. Fool to pass out
that way when he stuck me. He could still feel the sickening lunge of
the needle. He gritted his teeth. After this I got to have some luck.... I
got to have some luck.

Two stout men and a lean man sit at a table by a window. The
light of a zinc sky catches brightedged glints off glasses, silverware,
oystershells, eyes. George Baldwin has his back to the window. Gus
McNiel sits on his right, and Densch on his left. When the waiter
leans over to take away the empty oystershells he can see through
the window, beyond the graystone parapet, the tops of a few
buildings jutting like the last trees at the edge of a cliff and the tinfoil
reaches of the harbor littered with ships. “I’m lecturin you this time,
George.... Lord knows you used to lecture me enough in the old
days. Honest it’s rank foolishness,” Gus McNiel is saying. “... It’s rank
foolishness to pass up the chance of a political career at your time of
life.... There’s no man in New York better fitted to hold office ...”
 “Looks to me as if it were your duty, Baldwin,” says Densch in a
deep voice, taking his tortoiseshell glasses out of a case and
applying them hurriedly to his nose.
The waiter has brought a large planked steak surrounded by
bulwarks of mushrooms and chopped carrots and peas and frilled
browned mashed potatoes. Densch straightens his glasses and
stares attentively at the planked steak.
“A very handsome dish Ben, a very handsome dish I must say....
It’s just this Baldwin ... as I look at it ... the country is going through a
dangerous period of reconstruction ... the confusion attendant on the
winding up of a great conflict ... the bankruptcy of a continent ...
bolshevism and subversive doctrines rife ... America ...” he says,
cutting with the sharp polished steel knife into the thick steak, rare
and well peppered. He chews a mouthful slowly. “America,” he
begins again, “is in the position of taking over the receivership of the
world. The great principles of democracy, of that commercial
freedom upon which our whole civilization depends are more than
ever at stake. Now as at no other time we need men of established
ability and unblemished integrity in public office, particularly in the
offices requiring expert judicial and legal knowledge.”
“That’s what I was tryin to tell ye the other day George.”
“But that’s all very well Gus, but how do you know I’d be
elected.... After all it would mean giving up my law practice for a
number of years, it would mean ...”
“You just leave that to me.... George you’re elected already.”
“An extraordinarily good steak,” says Densch, “I must say.... No
but newspaper talk aside ... I happen to know from a secret and
reliable source that there is a subversive plot among undesirable
elements in this country.... Good God think of the Wall Street bomb
outrage.... I must say that the attitude of the press has been
gratifying in one respect ... in fact we’re approaching a national unity
undreamed of before the war.”
“No but George,” breaks in Gus, “put it this way.... The publicity
value of a political career’d kinder bolster up your law practice.”
 “It would and it wouldn’t Gus.”
Densch is unrolling the tinfoil off a cigar. “At any rate it’s a grand
sight.” He takes off his glasses and cranes his thick neck to look out
into the bright expanse of harbor that stretches full of masts, smoke,
blobs of steam, dark oblongs of barges, to the hazeblurred hills of
Staten Island.
Bright flakes of cloud were scaling off a sky of crushing indigo
over the Battery where groups of dingy darkdressed people stood
round the Ellis Island landing station and the small boat dock waiting
silently for something. Frayed smoke of tugs and steamers hung low
and trailed along the opaque glassgreen water. A threemasted
schooner was being towed down the North River. A newhoisted jib
flopped awkwardly in the wind. Down the harbor loomed taller, taller
a steamer head on, four red stacks packed into one, creamy
superstructure gleaming. “Mauretania just acomin in twentyfour
hours lyte,” yelled the man with the telescope and fieldglasses....
“Tyke a look at the Mauretania, farstest ocean greyhound, twentyfour
hours lyte.” The Mauretania stalked like a skyscraper through the
harbor shipping. A rift of sunlight sharpened the shadow under the
broad bridge, along the white stripes of upper decks, glinted in the
rows of portholes. The smokestacks stood apart, the hull lengthened.
The black relentless hull of the Mauretania pushing puffing tugs
ahead of it cut like a long knife into the North River.
A ferry was leaving the immigrant station, a murmur rustled
through the crowd that packed the edges of the wharf. “Deportees....
It’s the communists the Department of Justice is having deported ...
deportees ... Reds.... It’s the Reds they are deporting.” The ferry was
out of the slip. In the stern a group of men stood still tiny like tin
soldiers. “They are sending the Reds back to Russia.” A
handkerchief waved on the ferry, a red handkerchief. People tiptoed
gently to the edge of the walk, tiptoeing, quiet like in a sickroom.
Behind the backs of the men and women crowding to the edge of
the water, gorillafaced chipontheshoulder policemen walked back
and forth nervously swinging their billies.
 “They are sending the Reds back to Russia.... Deportees....
Agitators.... Undesirables.” ... Gulls wheeled crying. A catsupbottle
bobbed gravely in the little ground-glass waves. A sound of singing
came from the ferryboat getting small, slipping away across the
water.
C’est la lutte finale, groupons-nous et demain
L’Internationale sera le genre humain.
“Take a look at the deportees.... Take a look at the undesirable
aliens,” shouted the man with the telescopes and fieldglasses. A
girl’s voice burst out suddenly, “Arise prisoners of starvation,” “Sh....
They could pull you for that.”
The singing trailed away across the water. At the end of a
marbled wake the ferryboat was shrinking into haze. International ...
shall be the human race. The singing died. From up the river came
the longdrawn rattling throb of a steamer leaving dock. Gulls
wheeled above the dark dingydressed crowd that stood silently
looking down the bay.
II. Nickelodeon

A
nickel before midnight buys tomorrow ...
holdup headlines, a cup of coffee in the
automat, a ride to Woodlawn, Fort Lee,
Flatbush.... A nickel in the slot buys chewing
gum. Somebody Loves Me, Baby Divine,
You’re in Kentucky Juss Shu’ As You’re Born
... bruised notes of foxtrots go limping out of
doors, blues, waltzes (We’d Danced the
Whole Night Through) trail gyrating tinsel
memories.... On Sixth Avenue on Fourteenth
there are still flyspecked stereopticons
where for a nickel you can peep at yellowed
yesterdays. Beside the peppering shooting
gallery you stoop into the flicker A Hot Time,
The Bachelor’s Surprise, The Stolen
Garter ... wastebasket of tornup
daydreams.... A nickel before midnight buys
our yesterdays.

R
uth Prynne came out of the doctor’s office pulled the fur tight
round her throat. She felt faint. Taxi. As she stepped in she
remembered the smell of cosmetics and toast and the littered
hallway at Mrs. Sunderlands. Oh I cant go home just yet. “Driver go
to the Old English Tea Room on Fortieth Street please.” She opened
her long green leather purse and looked in. My God, only a dollar a
quarter a nickel and two pennies. She kept her eyes on the figures
flickering on the taximeter. She wanted to break down and cry.... The
way money goes. The gritty cold wind rasped at her throat when she
got out. “Eighty cents miss.... I haven’t any change miss.” “All right
keep the change.” Heavens only thirtytwo cents.... Inside it was
warm and smelled cozily of tea and cookies.
“Why Ruth, if it isn’t Ruth.... Dearest come to my arms after all
these years.” It was Billy Waldron. He was fatter and whiter than he
used to be. He gave her a stagy hug and kissed her on the forehead.
“How are you? Do tell me.... How distinguée you look in that hat.”
“I’ve just been having my throat X-rayed,” she said with a giggle.
“I feel like the wrath of God.”
“What are you doing Ruth? I havent heard of you for ages.”
“Put me down as a back number, hadn’t you?” She caught his
words up fiercely.
“After that beautiful performance you gave in The Orchard
Queen....”
“To tell the truth Billy I’ve had a terrible run of bad luck.”
“Oh I know everything is dead.”
“I have an appointment to see Belasco next week.... Something
may come of that.”
“Why I should say it might Ruth.... Are you expecting someone?”
“No.... Oh Billy you’re still the same old tease.... Dont tease me
this afternoon. I dont feel up to it.”
“You poor dear sit down and have a cup of tea with me.
“I tell you Ruth it’s a terrible year. Many a good trouper will pawn
the last link of his watch chain this year.... I suppose you’re going the
rounds.”
“Dont talk about it.... If I could only get my throat all right.... A thing
like that wears you down.”
“Remember the old days at the Somerville Stock?”
“Billy could I ever forget them?... Wasnt it a scream?”
“The last time I saw you Ruth was in The Butterfly on the Wheel in
Seattle. I was out front....”
 “Why didn’t you come back and see me?”
“I was still angry at you I suppose.... It was my lowest moment. In
the valley of shadow ... melancholia ... neurasthenia. I was stranded
penniless.... That night I was a little under the influence, you
understand. I didn’t want you to see the beast in me.”
Ruth poured herself a fresh cup of tea. She suddenly felt
feverishly gay. “Oh but Billy havent you forgotten all that?... I was a
foolish little girl then.... I was afraid that love or marriage or anything
like that would interfere with my art, you understand.... I was so
crazy to succeed.”
“Would you do the same thing again?”
“I wonder....”
“How does it go?... The moving finger writes and having writ
moves on ...”
“Something about Nor all your tears wash out a word of it ... But
Billy,” she threw back her head and laughed, “I thought you were
getting ready to propose to me all over again.... Ou my throat.”
“Ruth I wish you werent taking that X-ray treatment.... I’ve heard
it’s very dangerous. Dont let me alarm you about it my dear ... but I
have heard of cases of cancer contracted that way.”
“That’s nonsense Billy.... That’s only when X-rays are improperly
used, and it takes years of exposure.... No I think this Dr. Warner’s a
remarkable man.”
Later, sitting in the uptown express in the subway, she still could
feel his soft hand patting her gloved hand. “Goodby little girl, God
bless you,” he’d said huskily. He’s gotten to be a ham actor if there
ever was one, something was jeering inside her all the while. “Thank
heavens you will never know.” ... Then with a sweep of his
broadbrimmed hat and a toss of his silky white hair, as if he were
playing in Monsieur Beaucaire, he had turned and walked off among
the crowd up Broadway. I may be down on my luck, but I’m not all
ham inside the way he is.... Cancer he said. She looked up and
down the car at the joggling faces opposite her. Of all those people
one of them must have it. Four Out of Every Five Get ... Silly,
that’s not cancer. Ex-lax, Nujol, O’Sullivan’s.... She put her hand
to her throat. Her throat was terribly swollen, her throat throbbed
feverishly. Maybe it was worse. It is something alive that grows in
flesh, eats all your life, leaves you horrible, rotten.... The people
opposite stared straight ahead of them, young men and young
women, middleaged people, green faces in the dingy light, under the
sourcolored advertisements. Four Out of Every Five ... A trainload
of jiggling corpses, nodding and swaying as the express roared
shrilly towards Ninetysixth Street. At Ninetysixth she had to change
for the local.

Dutch Robertson sat on a bench on Brooklyn Bridge with the

collar of his army overcoat turned up, running his eye down Business
Opportunities. It was a muggy fog-choked afternoon; the bridge was
dripping and aloof like an arbor in a dense garden of
steamboatwhistles. Two sailors passed. “Ze best joint I’ve been in
since B. A.”
Partner movie theater, busy neighborhood ... stand investigation
... $3,000.... Jez I haven’t got three thousand mills.... Cigar stand,
busy building, compelled sacrifice.... Attractive and completely
outfitted radio and music shop ... busy.... Modern mediumsized
printingplant consisting of cylinders, Kelleys, Miller feeders, job
presses, linotype machines and a complete bindery.... Kosher
restaurant and delicatessen.... Bowling alley ... busy.... Live spot
large dancehall and other concessions. We Buy False Teeth, old
gold, platinum, old jewelry. The hell they do. Help Wanted Male.
That’s more your speed you rummy. Addressers, first class
penmen.... Lets me out.... Artist, Attendant, Auto, Bicycle and
Motorcycle repair shop.... He took out the back of an envelope and
marked down the address. Bootblacks.... Not yet. Boy; no I guess I
aint a boy any more, Candystore, Canvassers, Carwashers,
Dishwasher. Earn While You Learn. Mechanical dentistry is your
shortest way to success.... No dull seasons....
 “Hello Dutch.... I thought I’d never get here.” A grayfaced girl in a
red hat and gray rabbit coat sat down beside him.
“Jez I’m sick o readin want ads.” He stretched out his arms and
yawned letting the paper slip down his legs.
“Aint you chilly, sittin out here on the bridge?”
“Maybe I am.... Let’s go and eat.” He jumped to his feet and put
his red face with its thin broken nose close to hers and looked in her
black eyes with his pale gray eyes. He tapped her arm sharply.
“Hello Francie.... How’s my lil girl?”
They walked back towards Manhattan, the way she had come.
Under them the river glinted through the mist. A big steamer drifted
by slowly, lights already lit; over the edge of the walk they looked
down the black smokestacks.
“Was it a boat as big as that you went overseas on Dutch?”
“Bigger ’n that.”
“Gee I’d like to go.”
“I’ll take you over some time and show you all them places over
there ... I went to a lot of places that time I went A.W.O.L.”
In the L station they hesitated. “Francie got any jack on you?”
“Sure I got a dollar.... I ought to keep that for tomorrer though.”
“All I got’s my last quarter. Let’s go eat two fiftyfive cent dinners at
that chink place ... That’ll be a dollar ten.”
“I got to have a nickel to get down to the office in the mornin.”
“Oh Hell! Goddam it I wish we could have some money.”
“Got anything lined up yet?”
“Wouldn’t I have told ye if I had?”
“Come ahead I’ve got a half a dollar saved up in my room. I can
take carfare outa that.” She changed the dollar and put two nickels
into the turnstile. They sat down in a Third Avenue train.
“Say Francie will they let us dance in a khaki shirt?”
 “Why not Dutch it looks all right.”
“I feel kinder fussed about it.”
The jazzband in the restaurant was playing Hindustan. It smelled
of chop suey and Chinese sauce. They slipped into a booth.
Slickhaired young men and little bobhaired girls were dancing
hugged close. As they sat down they smiled into each other’s eyes.
“Jez I’m hungry.”
“Are you Dutch?”
He pushed forward his knees until they locked with hers. “Gee
you’re a good kid,” he said when he had finished his soup. “Honest
I’ll get a job this week. And then we’ll get a nice room an get married
an everything.”
When they got up to dance they were trembling so they could
barely keep time to the music.
“Mister ... no dance without ploper dless ...” said a dapper
Chinaman putting his hand on Dutch’s arm.
“Waz he want?” he growled dancing on.
“I guess it’s the shirt, Dutch.”
“The hell it is.”
“I’m tired. I’d rather talk than dance anyway ...” They went back to
their booth and their sliced pineapple for dessert.
Afterwards they walked east along Fourteenth. “Dutch cant we go
to your room?”
“I ain’t got no room. The old stiff wont let me stay and she’s got all
my stuff. Honest if I dont get a job this week I’m goin to a recruiting
sergeant an re-enlist.”
“Oh dont do that; we wouldn’t ever get married then Dutch.... Gee
though why didn’t you tell me?”
“I didn’t want to worry you Francie.... Six months out of work ...
Jez it’s enough to drive a guy cookoo.”
 “But Dutch where can we go?”
“We might go out that wharf.... I know a wharf.”
“It’s so cold.”
“I couldn’t get cold when you were with me kid.”
“Dont talk like that.... I dont like it.”
They walked leaning together in the darkness up the muddy
rutted riverside streets, between huge swelling gastanks,
brokendown fences, long manywindowed warehouses. At a corner
under a streetlamp a boy catcalled as they passed.
“I’ll poke your face in you little bastard,” Dutch let fly out of the
corner of his mouth.
“Dont answer him,” Francie whispered, “or we’ll have the whole
gang down on us.”
They slipped through a little door in a tall fence above which crazy
lumberpiles towered. They could smell the river and cedarwood and
sawdust. They could hear the river lapping at the piles under their
feet. Dutch drew her to him and pressed his mouth down on hers.
“Hay dere dont you know you cant come out here at night
disaway?” a voice yapped at them. The watchman flashed a lantern
in their eyes.
“All right keep your shirt on, we were just taking a little walk.”
“Some walk.”
They were dragging themselves down the street again with the
black riverwind in their teeth.
“Look out.” A policeman passed whistling softly to himself. They
drew apart. “Oh Francie they’ll be takin us to the nuthouse if we keep
this up. Let’s go to your room.”
“Landlady’ll throw me out, that’s all.”
“I wont make any noise.... You got your key aint ye? I’ll sneak out
before light. Goddam it they make you feel like a skunk.”
 “All right Dutch let’s go home.... I dont care no more what
happens.”
They walked up mudtracked stairs to the top floor of the
tenement.
“Take off your shoes,” she hissed in his ear as she slipped the key
in the lock.
“I got holes in my stockings.”
“That dont matter, silly. I’ll see if it’s all right. My room’s way back
past the kitchen so if they’re all in bed they cant hear us.”
When she left him he could hear his heart beating. In a second
she came back. He tiptoed after her down a creaky hall. A sound of
snoring came through a door. There was a smell of cabbage and
sleep in the hall. Once in her room she locked the door and put a
chair against it under the knob. A triangle of ashen light came in from
the street. “Now for crissake keep still Dutch.” One shoe still in each
hand he reached for her and hugged her.
He lay beside her whispering on and on with his lips against her
ear. “And Francie I’ll make good, honest I will; I got to be a sergeant
overseas till they busted me for goin A.W.O.L. That shows I got it in
me. Once I get a chance I’ll make a whole lot of jack and you an
me’ll go back an see Château Teery an Paree an all that stuff;
honest you’d like it Francie ... Jez the towns are old and funny and
quiet and cozy-like an they have the swellest ginmills where you sit
outside at little tables in the sun an watch the people pass an the
food’s swell too once you get to like it an they have hotels all over
where we could have gone like tonight an they dont care if your
married or nutten. An they have big beds all cozy made of wood and
they bring ye up breakfast in bed. Jez Francie you’d like it.”

They were walking to dinner through the snow. Big snowfeathers

spun and spiraled about them mottling the glare of the streets with
blue and pink and yellow, blotting perspectives.
 “Ellie I hate to have you take that job.... You ought to keep on with
your acting.”
“But Jimps, we’ve got to live.”
“I know ... I know. You’d certainly didn’t have your wits about you
Ellie when you married me.”
“Oh let’s not talk about it any more.”
“Do let’s have a good time tonight.... It’s the first snow.”
“Is this the place?” They stood before an unlighted basement door
covered by a closemeshed grating. “Let’s try.”
“Did the bell ring?”
“I think so.”
The inner door opened and a girl in a pink apron peered out at
them. “Bon soir mademoiselle.”
“Ah ... bon soir monsieur ’dame.” She ushered them into a
foodsmelling gaslit hall hung with overcoats and hats and mufflers.
Through a curtained door the restaurant blew in their faces a hot
breath of bread and cocktails and frying butter and perfumes and
lipsticks and clatter and jingling talk.
“I can smell absinthe,” said Ellen. “Let’s get terribly tight.”
“Good Lord, there’s Congo.... Dont you remember Congo Jake at
the Seaside Inn?”
He stood bulky at the end of the corridor beckoning to them. His
face was very tanned and he had a glossy black mustache. “Hello
Meester ’Erf.... Ow are you?”
“Fine as silk. Congo I want you to meet my wife.”
“If you dont mind the keetchen we will ’ave a drink.”
“Of course we dont.... It’s the best place in the house. Why you’re
limping.... What did you do to your leg?”
“Foutu ... I left it en Italie.... I couldnt breeng it along once they’d
cut it off.”
 “How was that?”
“Damn fool thing on Mont Tomba.... My bruderinlaw e gave me a
very beautiful artificial leemb.... Sit ’ere. Look madame now can you
tell which is which?”
“No I cant,” said Ellie laughing. They were at a little marble table
in the corner of the crowded kitchen. A girl was dishing out at a deal
table in the center. Two cooks worked over the stove. The air was
rich with sizzling fatty foodsmells. Congo hobbled back to them with
three glasses on a small tray. He stood over them while they drank.
“Salut,” he said, raising his glass. “Absinthe cocktail, like they
make it in New Orleans.”
“It’s a knockout.” Congo took a card out of his vest pocket:
MARQUIS DES COULOMMIERS
Imports

Riverside 11121
“Maybe some day you need some little ting ... I deal in nutting but
prewar imported. I am the best bootleggair in New York.”
“If I ever get any money I certainly will spend it on you Congo....
How do you find business?”
“Veree good.... I tell you about it. Tonight I’m too busee.... Now I
find you a table in the restaurant.”
“Do you run this place too?”
“No this my bruderinlaw’s place.”
“I didnt know you had a sister.”
“Neither did I.”
When Congo limped away from their table silence came down
between them like an asbestos curtain in a theater.
“He’s a funny duck,” said Jimmy forcing a laugh.
“He certainly is.”