Bank Liquidity Creation Following Regulatory Interventions and Capital Support
39 Pages Posted: 11 Aug 2011 Last revised: 6 Sep 2017
Date Written: January 20, 2016
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.
Keywords: liquidity creation, bank distress, regulatory interventions, capital support, bailouts
JEL Classification: G21, G28
Suggested Citation: Suggested Citation