 The moderating role of capital on the relationship between bank liquidity creation and failure riskChen Zheng, (Wai Kong) Cheung, Adrian and Tom Cronje Journal of Banking & Finance, 2019, vol. 108, issue C Abstract: We examine the role of bank capital in moderating the relationship between bank liquidity creation and the failure risk in U.S. banks over the period of 2003–2014. We find that, conditional on bank capital, bank liquidity creation is related to bank failure risk negatively. The negative relationship is moderated positively (i.e., strengthened) by (changes in) bank capital. This finding is consistent with the view that banks may strengthen their solvency through increased capital in response to the illiquidity risk associated with liquidity creation; and higher capital enhances the ability of banks to create liquidity. The result is robust to different estimation methods, and alternative measures of liquidity creation, bank failure risk, and bank capital. Further analysis shows that the significant and negative effect is more prominent for small banks, and the impact of bank capital was more pronounced during the recent financial crisis of 2007–2009. Keywords: Liquidity creation; Bank failure; Bank capital; Liquidity risk; Bank size; Crisis (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:108:y:2019:i:c:s0378426619302262 DOI: 10.1016/j.jbankfin.2019.105651 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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