Credit Unions as Liquidity Creators
30 Pages Posted: 26 Sep 2011 Last revised: 7 Jan 2012
This paper examines the level and the main determinants of liquidity created by credit unions. The contribution of credit unions to the aggregate liquidity created by the financial system has increased over time from $206 billion in 2000 to $318 billion in 2008. We document a negative relationship between the level of capital and liquidity created by credit unions across all size classes. Liquidity creation is positively related to the level of deposit insurance for medium credit unions and for credit unions with no special credit and borrowing agreements and negatively related to deposit insurance for a sample of large credit unions and for credit unions with special credit and borrowing agreements. The evidence suggests that credit unions’ decision to substitute insured funds with funds obtained through special credit and borrowing agreements alters the traditional role played by deposit insurance on liquidity creation.
Keywords: Liquidity creation; Capital structure; Deposit insurance
JEL Classification: G21, G28, and G32
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