Bank Liquidity Creation, Monetary Policy, and Financial Crises

Berger, Allen N.; Bouwman, Christa H. S.

doi:10.2139/ssrn.1952728

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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

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: 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