Competition and Bank Liquidity Creation

Abstract

Although liquidity creation is a key banking function, little is known about its determinants. We use a new identification strategy to assess whether an intensification of competition among banks increases or decreases liquidity creation. Consistent with the predictions of some theoretical models, we find that regulatory-induced competition has a negative effect on bank liquidity creation and these liquidity-reducing effects are smaller among more profitable banks and larger among smaller banks.

Keywords: Competition, Bank Liquidity Creation, Bank Deregulation

JEL Classification: G21, G28, G32, G38