Bank Liquidity Creation and Systemic Risk

58 Pages Posted: 15 Apr 2020 Last revised: 29 Dec 2020

See all articles by Denis Davydov

Denis Davydov

University of Vaasa - Department of Accounting and Finance

Sami Vähämaa

University of Vaasa

Sara Yasar

University of Vaasa - Department of Accounting and Finance

Date Written: October 28, 2020

Abstract

This paper examines the linkage between bank liquidity creation and systemic risk. Using quarterly data on U.S. bank holding companies from 2003 to 2016, we document that liquidity creation decreases systemic risk at the individual bank level after controlling for bank size, asset risk, and other bank-specific attributes. After decomposing systemic risk into bank-specific tail risk and systemic linkage, we find that the riskiness of individual banks is negatively linked to liquidity creation. Nevertheless, our results also demonstrate that liquidity creation strengthens the systemic linkage of individual banks to severe shocks in the financial system. Overall, our empirical findings demonstrate that the level of liquidity creation may have important implications for financial stability and the prudential supervision of financial institutions.

Keywords: bank liquidity creation, systemic risk, systemic linkage, tail risk

JEL Classification: G21, G28, G32

Suggested Citation

Davydov, Denis and Vähämaa, Sami and Yasar, Sara, Bank Liquidity Creation and Systemic Risk (October 28, 2020). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3560800 or http://dx.doi.org/10.2139/ssrn.3560800

Denis Davydov

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

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

Sami Vähämaa (Contact Author)

University of Vaasa ( email )

P.O. Box 700
Vaasa, FI-65101
Finland
+358 29 449 8455 (Phone)

HOME PAGE: http://www.univaasa.fi/~sami

Sara Yasar

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

P.O. Box 700
FIN-65101 Vaasa, FI-65101
Finland

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