Bank Liquidity Creation (Previously titled 'The Measurement of Bank Liquidity Creation and the Effect of Capital')

64 Pages Posted: 26 Feb 2005 Last revised: 17 Aug 2008

Allen N. Berger

University of South Carolina - Darla Moore School of Business; Wharton Financial Institutions Center; European Banking Center

Christa H. S. Bouwman

Texas A&M University; Wharton Financial Institutions Center

Date Written: April 30, 2008

Abstract

Although the modern theory of financial intermediation portrays liquidity creation as an essential role of banks, comprehensive measures of bank liquidity creation do not exist. We construct four measures and apply them to data on virtually all U.S. banks from 1993-2003. We find that bank liquidity creation increased every year and exceeded $2.8 trillion in 2003. Large banks, multibank holding company members, retail banks, and recently-merged banks created the most liquidity. Bank liquidity creation is positively correlated with bank value. Testing recent theories of the relationship between capital and liquidity creation, we find that the relationship is positive for large banks and negative for small banks.

Notes: Previously titled Bank Capital and Liquidity Creation.

Keywords: Capital Structure, Liquidity Creation, Regulation, and Banking

JEL Classification: G32, G28, G21

Suggested Citation

Berger, Allen N. and Bouwman, Christa H. S., Bank Liquidity Creation (Previously titled 'The Measurement of Bank Liquidity Creation and the Effect of Capital') (April 30, 2008). Available at SSRN: https://ssrn.com/abstract=672784 or http://dx.doi.org/10.2139/ssrn.672784

Allen N. Berger

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

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)

Wharton Financial Institutions Center

Philadelphia, PA 19104-6367
United States

European Banking Center

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Christa H. S. Bouwman (Contact Author)

Texas A&M University ( email )

360H Wehner
College Station, TX 77843-4218
United States
979-845-3514 (Phone)
979-845-3514 (Fax)

HOME PAGE: http://people.tamu.edu/~cbouwman/

Wharton Financial Institutions Center

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

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