Expanding the Bank Liquidity Creation Concept: Bank Capital and Secondary Market Loan Liquidity

55 Pages Posted: 9 Jun 2020 Last revised: 7 Jul 2021

See all articles by Allen N. Berger

Allen N. Berger

University of South Carolina - Darla Moore School of Business

Donghang Zhang

University of South Carolina

Yijia (Eddie) Zhao

University of Massachusetts Boston - College of Management

Date Written: May 2, 2021

Abstract

We expand the bank liquidity creation concept from its current focus on bank portfolios to include providing liquidity to secondary markets for financial assets. We test opposing theories of the effects of bank capital on secondary market liquidity of syndicated loans. We find that higher bank capital significantly increases secondary market loan liquidity, consistent with risk absorption theory. The data also support the loan riskiness and bank balance sheet quality channels behind this theory. We use the exogenous capital shock from the 2012 JPMorgan Chase ‘London Whale’ incident to help establish causality. Our findings have important research and policy implications.

Keywords: Bank liquidity creation, bank capital, syndicated loans, secondary loan market

JEL Classification: G12, G21, G23

Suggested Citation

Berger, Allen N. and Zhang, Donghang and Zhao, Yijia, Expanding the Bank Liquidity Creation Concept: Bank Capital and Secondary Market Loan Liquidity (May 2, 2021). Available at SSRN: https://ssrn.com/abstract=3600578 or http://dx.doi.org/10.2139/ssrn.3600578

Allen N. Berger

University of South Carolina - Darla Moore School of Business ( email )

1014 Greene St.
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)

Donghang Zhang

University of South Carolina ( email )

1014 Greene Street
Darla Moore Sch
Columbia, SC SC 29208
United States
8037770242 (Phone)
29208 (Fax)

HOME PAGE: http://https://sc.edu/study/colleges_schools/moore/directory/zhang_donghang.php

Yijia Zhao (Contact Author)

University of Massachusetts Boston - College of Management ( email )

100 Morrissey Blvd.
Boston, MA 02125
United States

HOME PAGE: http://sites.google.com/view/eddie-zhao/home

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