Bank Liquidity Creation, Monetary Policy, and Financial Crises

48 Pages Posted: 14 Nov 2011 Last revised: 11 May 2012

See all articles by Allen N. Berger

Allen N. Berger

University of South Carolina - Darla Moore School of Business; Wharton Financial Institutions Center; European Banking Center

Christa H. S. Bouwman

Texas A&M University; Wharton Financial Institutions Center

Date Written: March 30, 2012

Abstract

How well does monetary policy affect bank behavior, particularly during financial crises? What is the role of banks in creating asset bubbles that burst and lead to crises? We address these issues by focusing on bank liquidity creation, a comprehensive measure of bank output that accounts for all on- and off-balance sheet activities. We find that: (1) during normal times, monetary policy affects liquidity creation only for small banks; (2) monetary policy effects are weaker for banks of all sizes during financial crises; (3) high liquidity creation (relative to trend) helps predict future crises after controlling for other factors.

Keywords: Monetary Policy, Financial Crises, Liquidity Creation, Banking

JEL Classification: E52, G01, G28, G21

Suggested Citation

Berger, Allen N. and Bouwman, Christa H. S., Bank Liquidity Creation, Monetary Policy, and Financial Crises (March 30, 2012). Available at SSRN: https://ssrn.com/abstract=1952728 or http://dx.doi.org/10.2139/ssrn.1952728

Allen N. Berger

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)

Wharton Financial Institutions Center

Philadelphia, PA 19104-6367
United States

European Banking Center

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Christa H. S. Bouwman (Contact Author)

Texas A&M University ( email )

360H Wehner
College Station, TX 77843-4218
United States
979-845-3514 (Phone)
979-845-3514 (Fax)

HOME PAGE: http://people.tamu.edu/~cbouwman/

Wharton Financial Institutions Center

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

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