Liquidity: How Banks Create It and How It Should Be Regulated

The Oxford Handbook of Banking, 2nd edition, A.N. Berger, P. Molyneux, and J.O.S. Wilson, eds, Forthcoming

50 Pages Posted: 10 Aug 2013 Last revised: 27 Oct 2013

See all articles by Christa H. S. Bouwman

Christa H. S. Bouwman

Texas A&M University; Wharton Financial Institutions Center

Date Written: October 25, 2013

Abstract

Liquidity creation is a core function of banks and an economic service of substantial importance to the economy. This chapter reviews and synthesizes the theoretical and empirical literature on bank liquidity creation. The focus is on the economics of bank liquidity creation, both in the traditional relationship banking context and in the shadow banking context. The related prudential regulation issues – pertaining mainly to capital requirements and liquidity requirements – are also discussed. A historical overview is provided, starting in the early 1800s and ending with Basel III and the Dodd-Frank Act. Open research questions are identified.

Keywords: Banking, Relationship Banking, Shadow Banking, Capital, Capital Requirements, Liquidity Creation, Liquidity, Liquidity Requirements, Regulation

JEL Classification: G01, G21, G28, G32

Suggested Citation

Bouwman, Christa H. S., Liquidity: How Banks Create It and How It Should Be Regulated (October 25, 2013). The Oxford Handbook of Banking, 2nd edition, A.N. Berger, P. Molyneux, and J.O.S. Wilson, eds, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2307727

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

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