Bank Liquidity, Market Participation, and Economic Growth

37 Pages Posted: 16 Jan 2013 Last revised: 28 Oct 2016

See all articles by Elena Mattana

Elena Mattana

Aarhus University

Ettore Panetti

University of Naples Federico II, CSEF - Center for Studies in Economics and Finance, Students; UECE - Research Unit on Complexity in Economics; SUERF - The European money and finance forum; CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF)

Date Written: November 15, 2012

Abstract

We report evidence that bank liquidity ratios (liquid assets as a percentage of total assets) decrease during the process of economic development. To reconcile this observation with the increasing importance of financial markets and the increasing direct participation of individual investors in them, we build a neoclassical growth model with banks and markets. In this environment, banks engage in cross-subsidization of the impatient depositors to keep up with the competitive pressure from the markets. Moreover, as the economy grows, it becomes easier for the individuals to access the market, and the banks react to this by lowering their liquidity ratios. In a panel of 45 countries, we find evidence that such a mechanism is into place: a one-unit increase in an index of securities market liberalization leads to a drop in the bank liquidity ratio between 15 and 22 per cent.

Keywords: financial intermediation, liquidity, market participation, economic growth

JEL Classification: D91, E44, G21, O16

Suggested Citation

Mattana, Elena and Panetti, Ettore, Bank Liquidity, Market Participation, and Economic Growth (November 15, 2012). Journal of Banking and Finance, Vol. 48, 2014, Available at SSRN: https://ssrn.com/abstract=2200798 or http://dx.doi.org/10.2139/ssrn.2200798

Elena Mattana

Aarhus University ( email )

Nordre Ringgade 1
Aarhus, 8000
Denmark

Ettore Panetti (Contact Author)

University of Naples Federico II, CSEF - Center for Studies in Economics and Finance, Students ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, 80126
Italy

UECE - Research Unit on Complexity in Economics ( email )

ISEG/UTL Rua Miguel Lupi 20
Lisboa, 1249-078
Portugal

SUERF - The European money and finance forum ( email )

PO Box 98
Amsterdam, 1000AB
Netherlands

CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF) ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

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