Funding Liquidity Creation by Banks

Anjan V. Thakor and Edison Yu

No 23-02, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: Relying on theories in which bank loans create deposits—a process we call “funding liquidity creation”—we measure how much funding liquidity the U.S. banking system creates. Private money creation by banks enables lending to not be constrained by the supply of cash deposits. During the 2001–2020 period, 92 percent of bank deposits were due to funding liquidity creation, and during 2011–2020 funding liquidity creation averaged $10.7 trillion per year, or 57 percent of GDP. Using natural disasters data, we provide causal evidence that better-capitalized banks create more funding liquidity and lend more even during times when cash deposit balances are falling.

Pages: 23 pages
Date: 2023-01-30
New Economics Papers: this item is included in nep-fdg and nep-mon
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DOI: 10.21799/frbp.wp.2023.02

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