Cyclicality of Bank Liquidity Creation

29 Pages Posted: 11 Mar 2017 Last revised: 12 Jan 2019

See all articles by Denis Davydov

Denis Davydov

University of Vaasa - Department of Accounting and Finance

Zuzana Fungáčová

Bank of Finland

Laurent Weill

University of Strasbourg - LaRGE Research Center (Laboratoire de Recherche en Gestion et Economie)

Date Written: March 10, 2017

Abstract

This paper investigates the cyclicality of bank liquidity creation. Since liquidity creation is a major economic function of banks, their liquidity creation behavior may amplify business cycle fluctuations. Using the methodology of Berger and Bouwman (2009) to compute liquidity creation measures, we analyze the relation between GDP growth and liquidity creation of Russian banks from 2004 to 2015. Detailed quarterly data on a very large sample of banks and coexistence of different bank ownership types (state-owned, domestic private and foreign banks), makes Russia an ideal natural laboratory for study of cyclicality of liquidity creation for banks. We find that liquidity creation of banks is procyclical. We show that the liquidity creation behavior of state-owned banks and foreign banks is similar to that of domestic private banks in terms of procyclicality. We further find that the magnitude of procyclicality is higher for liquidity creation than for lending. Thus, while ownership of banks does not influence the liquidity creation behavior of banks, such behavior can amplify business cycle fluctuations.

Keywords: liquidity creation, bank, state ownership

JEL Classification: G21

Suggested Citation

Davydov, Denis and Fungáčová, Zuzana and Weill, Laurent, Cyclicality of Bank Liquidity Creation (March 10, 2017). BOFIT Discussion Paper No. 5/2017. Available at SSRN: https://ssrn.com/abstract=2931227

Denis Davydov (Contact Author)

University of Vaasa - Department of Accounting and Finance ( email )

P.O. Box 700
FIN-65101 Vaasa, FI-65101
Finland
+358 6 3248 268 (Phone)

Zuzana Fungáčová

Bank of Finland

P.O. Box 160
Helsinki 00101
Finland

Laurent Weill

University of Strasbourg - LaRGE Research Center (Laboratoire de Recherche en Gestion et Economie) ( email )

61 Avenue de la Forêt Noire
F-67085 Strasbourg Cedex
France

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