Bank liquidity creation,monetary policy,and financial crises

This paper examines the interplay among bank liquidity creation (which incorporates all bank on- and off-balance sheet activities), monetary policy, and financial crises. We find that: (1) high liquidity creation (relative to trend) – particularly off-balance sheet liquidity creation – helps predict crises, controlling for other factors; (2) monetary policy has statistically significant, but economically minor effects on liquidity creation by small banks during normal times, and these effects are even weaker during financial crises; (3) monetary policy has very little effects on medium and large bank liquidity creation during both normal times and crises. These findings suggest that authorities may wish to monitor bank liquidity creation closely in order to predict and perhaps lessen the likelihood of financial crises. They might also consider other tools to control bank liquidity creation, such as capital and liquidity requirements.     

利率市场化视角下货币政策对银行流动性创造的影响——基于银行风险承担的中介效应检验

运用1997-2015年中国186家银行的非平衡面板数据,实证检验银行风险承担在货币政策影响银行流动性创造过程中所发挥的中介效应.结果发现:货币政策通过影响银行风险承担而对银行流动性创造产生影响,即银行风险承担在货币政策影响银行流动性创造的过程中起到了中介作用.此外,货币政策通过影响银行风险承担对银行表内流动性创造和表外流动性创造都会产生影响.采用四种货币政策度量指标、两种银行流动性创造度量指标和两种银行风险承担度量指标的稳健性检验均支持了以上结论.进一步的实证研究表明:货币政策对银行风险承担和银行流动性创造的作用都会受到利率市场化水平的影响,即随着利率市场化水平的提升,货币政策对银行风险承担的影响会有所减弱,价格型货币政策对银行流动性创造的影响也会降低.     

Liquidity creation and bank capital structure in China

This paper investigates the relationship between liquidity creation and bank capital structure in China. We test the so-called “financial fragility-crowding out” hypothesis and the “risk absorption” hypothesis on Chinese banks and find that bank capital is negatively related to liquidity creation, which supports the financial fragility-crowding out hypothesis. In contrast, we find that foreign banks in China have a weaker relationship between liquidity creation and bank capital, which is consistent with the risk absorption hypothesis and findings in prior studies.     

The role of governance on bank liquidity creation

This paper examines the impact of internal bank governance on bank liquidity creation in the U.S. before, during and after the 2007–2009 financial crisis. Using bank holding company level data, we analyze whether better-governed banks create higher levels of liquidity. We find that this effect is positive and significant but only for large bank holding companies. Further analysis reveals that specific internal governance categories: CEO education, compensation structure, progressive practices, and ownership have a significant effect on bank liquidity. However, this positive effect occurs mostly during the crisis period, and for large banks that are also high liquidity creators. Finally, we find that the effect of governance on liquidity creation increases during the crisis period. These findings are robust even while controlling for liquidity measures, bank size, and endogeneity problems between governance and liquidity creation.     

Cyclicality of liquidity creation: Nonlinear evidence from US bank holding companies

Using a panel smooth transition regression framework on a new proxy of the business cycle (BC) index and quarterly data of US bank holding companies from 1993Q1 to 2020Q1, our results provide empirical support for the theory that the BC has a nonlinear effect on liquidity creation. We find a positive and highly significant nonlinear effect of the BC on liquidity creation, which not only supports the pro-cyclicality of liquidity creation but also improves the liquidity creation estimation compared to previous studies. The results are robust to different proxies of the BC and model specifications. We also document that US bank holding companies create liquidity more during the expansion phase (normal times) than during the recession phase (crisis times) of the BC, suggesting an asymmetrical effect of BC changes on liquidity creation. Our findings have important implications for financial market participants by suggesting that banks should keep alternative sources of funding on hand during the BC recession phase. Insights from our study also provide policy implications for central banks and prudent supervisors to consider when incentivizing banks, for instance, by lowering regulatory requirements, adjusting the policy rate, or implementing any other quantitative easing policy during the BC recession phase to keep the financial system efficient.     

Do stress tests affect bank liquidity creation?

We examine the impact of Federal Reserve stress tests from 2009 to 2016 on U.S. bank liquidity creation. Empirical results show that regulatory stress tests have a negative effect on both on-and off-balance sheet bank liquidity creation and asset-side liquidity creation. As banks enter the stress tests, they reduce their liquidity creation to avoid failing the stress tests. These results are consistent with the hypothesis that banks manage their risk exposures to meet higher capital requirements. The negative effect of stress testing on liquidity creation continues to persist in the quarters after the stress tests. Finally, stress test banks appear to increase liability-side liquidity creation. These findings highlight that the enhanced financial stability from greater regulatory scrutiny may be achieved at the expense of financial intermediation.     

ESG投资能够促进银行创造流动性吗?——兼论经济政策不确定性的调节效应

当前在我国致力于实现“碳达峰、碳中和”目标的大背景下,银行能否通过ESG投资促进流动性创造,进而推动高质量发展具有重大战略意义。本文利用2009年第一季度至2020年第二季度中国36家上市银行的面板数据,实证分析ESG投资对银行流动性创造的影响,并将其置于经济政策不确定性条件下予以讨论。研究发现:第一,ESG投资整体上促进流动性创造,表现为对资产端和负债端流动性创造的促进作用,以及对表外流动性创造的抑制作用。从ESG投资结构看,环境保护投资和社会责任投资均抑制流动性创造,而公司治理投资则促进流动性创造。异质性分析表明,地方性银行和资本短缺银行的ESG投资对流动性创造具有更强的促进作用。第二,中介机制分析发现,ESG投资主要通过“盈利”和“风险”渠道促进流动性创造。第三,在经济政策不确定性上升时期,ESG投资对流动性创造的促进作用更加显著。从ESG投资分项看,经济政策不确定性会增强环境保护投资和社会责任投资对流动性创造的抑制作用,以及公司治理投资对流动性创造的促进作用。本文结论为充分发挥ESG投资作用并以此推动高质量发展提供了政策启示。     

Liquidity creation,regulatory capital,and bank profitability

We examine the interrelationships among liquidity creation, regulatory capital, and bank profitability of US banks. We find that regulatory capital and liquidity creation affect each other positively after controlling for bank profitability. However, this relationship is largely driven by small banks and primarily during non-crisis periods. It is also sensitive to the level of banks' regulatory capital and how it is measured. Furthermore, we find that banks which create more liquidity and exhibit higher illiquidity risk have lower profitability. Finally, the relationship between regulatory capital and bank performance is not linear and depends on the level of capitalization. Regulatory capital is negatively related to bank profitability for higher capitalized banks but positively related to profitability for lower capitalized banks. Therefore, a change in regulatory capital has differential impacts on bank performance. Our findings have various implications for policymakers and bank regulators.     

Bank business models and liquidity creation

Using a large panel of US bank holding companies from 2001 to 2015, this study investigates the association between functional diversification and bank liquidity creation. I document evidence of lower liquidity creation for higher diversification. The effect of moving into nontraditional activities on liquidity creation is more apparent with large banks and less pronounced with small banks. The impact of diversification on liquidity creation is less significant during the late stage of crisis and is more clearly observed in small and medium-sized banks. Low liquidity creation banks, leveraged by a higher share of non-interest income, are more likely to further decrease their liquidity creation. The study is of interest to regulators and policymakers who are concerned about bank business models.     

Climate risk and bank liquidity creation: International evidence

This study examines the impact of climate risk on bank liquidity creation in 56 countries over the period 1995–2012. Specifically, it investigates whether the relationship between climate risk and bank liquidity creation varies by bank and country characteristics. The results reveal that climate sensitivity and exposure have negative impacts on overall liquidity creation, whereas climate adaptation has positive effects. These effects are more pronounced for larger banks with lower capital, banks located in lower-GDP and developing countries, and those in Asia. The results suggest that policymakers should exercise caution when formulating and implementing climate-related strategies, as these can influence liquidity creation, which in turn can affect macroeconomic stability.     

Do foreign ownership and home-host country distance matter? Evidence on the impact of bank market power on liquidity creation in a selected Southeast Asian country

This paper examines the roles of foreign ownership and home-host country distance in the impact of bank market power on bank liquidity creation in a selected Southeast Asian country (Malaysia) over the period 2001−2017. A key finding is that the impact of market power on liquidity creation is either significantly negative or insignificant for domestic banks, but is significantly positive for foreign banks, irrespective of the liquidity creation measures used. This finding points to evidence of “home-field advantage” of domestic banks as the banks possess greater ability to withstand interest margin compression, while competing with foreign banks in liquidity creation market. Moreover, this paper finds that foreign banks originated from countries with cultural, economic and institutional distance to the host country require greater market power to boost their liquidity creation performance, as compared to their domestic counterparts. Further analysis also indicates that the influence of host-home country distance is more evident among small foreign banks which have lower franchise value. Overall, the findings of this paper suggest that although bank competition policies may promote customer welfare, foreign banks should be granted with some degree of market power in the host country to help alleviating the banks’ operational challenges arising from home-host country distance.     

Do non-traditional banking activities reduce bank liquidity creation? Evidence from Vietnam

The study analyzes the impact of engaging in non-traditional banking activities on bank liquidity creation. This strand of research has almost gone unnoticed by academics so far. Based on a dataset of Vietnamese commercial banks from 2007 to 2018, we document that the liquidity creation function of banks decreases with the income from non-traditional banking segments. This impact is observed in both on- and off-balance sheets across multiple robustness tests of the static and dynamic panels regressed by the ordinary least squares method and the generalized method of moments. Further decomposing the non-interest income sources, we find that banks that engage more in non-traditional activities for fees and commissions tend to reduce the liquidity creation more compared to other counterparts. The findings offer insightful implications for regulatory agencies and bank managers in the determination of liquidity creation behavior in emerging markets.     

互联网金融影响了商业银行流动性创造吗?

选取2010-2019年中国98家商业银行年度数据就互联网金融对银行流动性创造的影响及其作用机制进行实证分析.研究发现:互联网金融通过分流银行存款及理财资金对银行盈利形成冲击,由此引发的"鲶鱼效应"会倒逼银行加大存贷期限错配来缓解盈利下降压力,从而促进银行流动性创造.相对于国有银行与城农商行,互联网金融对股份制银行流动性创造的促进力度更大.金融脱媒仅在P2P网络借贷对银行流动性创造的影响中承担着中介作用,但"第三方支付-金融脱媒-银行流动性创造"的传导渠道无效.银行业景气度提高会加剧互联网金融对流动性创造的促进作用,银行流动性创造存在顺周期倾向.     

Funding liquidity and bank risk taking

This study examines the relationship between funding liquidity and bank risk taking. Using quarterly data for U.S. bank holding companies from 1986 to 2014, we find evidence that banks having lower funding liquidity risk as proxied by higher deposit ratios, take more risk. A reduction in banks’ funding liquidity risk increases bank risk as evidenced by higher risk-weighted assets, greater liquidity creation and lower Z-scores. However, our results show that bank size and capital buffers usually limit banks from taking more risk when they have lower funding liquidity risk. Moreover, during the Global Financial Crisis banks with lower funding liquidity risk took less risk. The findings of this study have implications for bank regulators advocating greater liquidity and capital requirements for banks under Basel III.     

A Theory of Bank Capital

Banks can create liquidity precisely because deposits are fragile and prone to runs. Increased uncertainty makes deposits excessively fragile, creating a role for outside bank capital. Greater bank capital reduces the probability of financial distress but also reduces liquidity creation. The quantity of capital influences the amount that banks can induce borrowers to pay. Optimal bank capital structure trades off effects on liquidity creation, costs of bank distress, and the ability to force borrower repayment. The model explains the decline in bank capital over the last two centuries. It identifies overlooked consequences of having regulatory capital requirements and deposit insurance.     

Liquidity creation through efficient M&As: A viable solution for vulnerable banking systems? Evidence from a stress test under a panel VAR methodology

According to the “cost efficiency - liquidity creation” hypothesis (CELCH), introduced in this paper, a rise in a bank’s cost efficiency level increases its liquidity creation. By employing a novel stress test scenario under a panel VAR methodology, the CELCH and the direction of causality between liquidity creation and cost efficiency are tested. Moreover, using new measures of liquidity creation (Berger and Bouwman, 2009), the question of whether potential bank mergers and acquisitions (M&As) can enhance liquidity creation and generate additional credit channels in the economy is addressed. The robustness of potential consolidation scenarios are evaluated and compared through the use of new “half-life” measures (Chortareas and Kapetanios, 2013). In line with CELCH, the positive impact of cost efficiency on liquidity creation is shown. The empirical evidence further suggests that potential consolidation activity can enhance the flow of credit in the economy. Bank shocks seem to have the most persistent effect on both liquidity creation and cost efficiency. Finally, doubts are cast on the strategies followed by policy authorities regarding the recent wave of M&As in the banking sector.     

Does bank capital reduce liquidity creation?

This paper investigates the relationship between bank capital and liquidity creation against the backdrop of the 2007–2008 financial crisis. Analyzing an unbalanced panel of 11,617 U.S. commercial banks from 1996 to 2016, we find a negative association between regulatory capital and on-balance-sheet liquidity creation, but positive associations for small banks and after the financial crisis. Further, we observe lower liquidity creation among banks that participated in the Troubled Asset Relief Program (TARP). The results are largely robust to several alternate variable proxies and model specifications. Our findings suggest that “one-size-fits-all” policy may have some unintended consequences for banks.     

The impact of bank FinTech on liquidity creation: Evidence from China

This paper examines whether and how bank FinTech affects liquidity creation. Using panel data from Chinese commercial banks over the period 2008–2019 and bank-level FinTech indices constructed by a textual analysis method, we find robust evidence that banks with greater FinTech development create more liquidity for the public. This effect operates through deposit inflow, risk management, and cost efficiency channels. Furthermore, we find that the positive effect of bank FinTech on liquidity creation is more pronounced for banks with non-state ownership, unlisted status, and less liquidity creation.     

Bank Liquidity Creation and Risk‐Taking: Does Managerial Ability Matter?

This study investigates the impact of managerial ability on banks' liquidity creation and risk‐taking behavior. We find that higher ability managers create more liquidity and take more risk. During times of financial crisis, however, higher ability bank managers reduce liquidity creation as a way to de‐leverage their balance sheets. Our findings inform recent theoretical and empirical studies that investigate determinants of liquidity creation and risk by introducing managerial ability as a prominent antecedent of the banks' intermediation and risk‐transforming service. Moreover, this study has policy‐related implications, since managerial ability can be quantified as a key performance indicator for prudential supervision of banks and could help regulators to target intervention efforts more purposefully during times of crisis.     

Bank liquidity creation following regulatory interventions and capital support

We study the effects of regulatory interventions and capital support (bailouts) on banks’ liquidity creation. We rely on instrumental variables to deal with possible endogeneity concerns. Our key findings, which are based on a unique supervisory German dataset, are that regulatory interventions robustly trigger decreases in liquidity creation, while capital support does not affect liquidity creation. Additional results include the effects of these actions on different components of liquidity creation, lending, and risk taking. Our findings provide new and important insights into the debates about the design of regulatory interventions and bailouts.