Liquidity Creation and Bank Capital

Journal of Financial Services Research, Forthcoming

Posted: 25 Aug 2016 Last revised: 9 Oct 2018

See all articles by Barbara Casu

Barbara Casu

City University London - Sir John Cass Business School

Filippo di Pietro

University of Seville

Antonio Trujillo‐Ponce

Universidad Pablo de Olavide - Department of Financial Economics & Accounting

Date Written: October 3, 2018

Abstract

This paper aims to evaluate the relationship between capital and liquidity following the implementation of the Basel III rules. These regulatory measures target both increased capital ratios and a reduction of banks’ maturity transformation risk, which could result in excessive constraints on bank liquidity creation, thereby negatively affecting economic growth. Using a simultaneous equation model, we find a bi-causal negative relationship, which suggests that banks may reduce liquidity creation as capital increases; and when liquidity creation increases, banks reduce capital ratios. Our results therefore imply a trade-off between financial stability (higher capital, reduced risk) and economic growth (liquidity creation).

Keywords: bank capital, liquidity creation, illiquidity, net stable funding ratio, Basel III, eurozone banking system

JEL Classification: G21, G28

Suggested Citation

Casu, Barbara and di Pietro, Filippo and Trujillo-Ponce, Antonio, Liquidity Creation and Bank Capital (October 3, 2018). Journal of Financial Services Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2828619 or http://dx.doi.org/10.2139/ssrn.2828619

Barbara Casu

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Filippo Di Pietro

University of Seville ( email )

Sevilla
Spain

Antonio Trujillo-Ponce (Contact Author)

Universidad Pablo de Olavide - Department of Financial Economics & Accounting ( email )

Ctra. Utrera, Km.1
Sevilla, 41013
Spain

HOME PAGE: http://https://www.upo.es/investiga/banef/

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