Competition and Bank Liquidity Creation

Liangliang Jiang, Ross Levine () and Chen Lin

Journal of Financial and Quantitative Analysis, 2019, vol. 54, issue 2, 513-538

Abstract: We use a new identification strategy to assess whether an intensification of competition among banks increases or decreases the provision of a key banking service: liquidity creation. Although theory offers conflicting predictions about the impact of competition on liquidity creation, we find that regulatory-induced competition reduces liquidity creation. Consistent with a subset of models emphasizing that banks pushed toward insolvency reduce risk-taking activities, we discover that regulatory-induced competition reduces liquidity creation more among banks with less risk-absorbing capacity (e.g., less profitable banks).

Date: 2019
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Working Paper: Competition and Bank Liquidity Creation (2016)
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