Liquidity Creation and Trust Environment

Jérémie Bertrand, Paul-Olivier Klein and Jean-Loup Soula
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Jérémie Bertrand: LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique
Paul-Olivier Klein: UJML - Université Jean Moulin - Lyon 3 - Université de Lyon
Jean-Loup Soula: EM Strasbourg - École de Management de Strasbourg = EM Strasbourg Business School

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Abstract: Trust towards banks plays a central role in theoretical literature. Diamond and Dybvig (J Polit Econ 91:401–419, 1983) argue that in a trustworthy environment banks can easily collect deposit foster banking activity and asset transformation. Diamond and Rajan (J Polit Econ 109:287–327, 2001) posit that a high trust environment discourages banks from creating liquidity. To address these conflicting views, the current study measures liquidity creation using Berger and Bouwman's (Rev Financ Stud 22:3779–3837, 2009) methodology, then assesses the level of trust in the environment with four proxies and two additional instruments deployed in previous research. The results confirm a positive effect of trust in banks on liquidity creation, especially for small or state-chartered banks and during economic downturns. The results are robust to time effects and potential endogeneity concerns.

Keywords: Banking; Liquidity creation; Trust; Financial intermediation (search for similar items in EconPapers)
Date: 2021-04-21
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Published in Journal of Financial Services Research, 2021, 62 (3), pp.201-232. ⟨10.1007/s10693-021-00353-0⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03976673

DOI: 10.1007/s10693-021-00353-0

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