Cyclicality of Liquidity Creation: Non-linear Evidence from US Bank Holding Companies

39 Pages Posted: 21 Jun 2022

See all articles by Ghulame Rubbaniy

Ghulame Rubbaniy

Zayed University - College of Business

Ali Awais Khalid

University of Lahore (UOL) - Lahore Business School

Shoaib Ali

Air University - Islamabad

Efstathios Polyzos

Zayed University

Date Written: June 10, 2022

Abstract

Using panel smooth transition regression framework on a new proxy of business cycle (BC) index and quarterly data of US bank holding companies from 1993Q1 to 2020Q1, our results provide the empirical support to the theory that BC has non-linear effect on liquidity creation. We find a positive and highly significant non-linear effect of BC on liquidity creation, which not only supports the pro-cyclicality of liquidity creation but also improves the liquidity creation estimation compared to the existing studies. The results are robust to different proxies of BC and model specifications. We also document that the US bank holding companies involve in higher magnitude of liquidity creation during the expansion phase (normal times) compared to recession phase (crisis times) of the BC, suggesting an asymmetrical effect of BC changes on liquidity creation. Our findings have important implications for financial market participants by suggesting to keep alternative sources of funding in hand during the recession phase of BC. The insights from study also provide policy implications for central banks and prudent supervisors to consider incentivizing the banks for instance by lowering the regulatory requirements, adjusting the policy rate or through any other quantitative easing policy during recession phase of BC to keep the financial system efficient.

Keywords: Bank holding company; Liquidity creation; Business cycle; Panel smooth transition regression

JEL Classification: G21, O40, O43

Suggested Citation

Rubbaniy, Ghulame and Khalid, Ali Awais and Ali, Shoaib and Polyzos, Efstathios, Cyclicality of Liquidity Creation: Non-linear Evidence from US Bank Holding Companies (June 10, 2022). Available at SSRN: https://ssrn.com/abstract=4139760 or http://dx.doi.org/10.2139/ssrn.4139760

Ghulame Rubbaniy (Contact Author)

Zayed University - College of Business ( email )

Zayed University
P.O. Box 144534
Abu Dhabi
United Arab Emirates

Ali Awais Khalid

University of Lahore (UOL) - Lahore Business School ( email )

1-KM Bopatian Chowk, Defence Road
Lahore, Punjab 54000
Pakistan

Shoaib Ali

Air University - Islamabad ( email )

Service Road E-9
Islamabad, 44000
Pakistan

Efstathios Polyzos

Zayed University ( email )

Zayed University
P.O. Box 144534
Abu Dhabi
United Arab Emirates

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