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
Date Written: October 25, 2013
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: Suggested Citation