High liquidity creation and bank failures

Zuzana Fungáčová, Rima Turk Ariss and Laurent Weill

Journal of Financial Stability, 2021, vol. 57, issue C

Abstract: We formulate the “High Liquidity Creation Hypothesis” (HLCH) that a proliferation in the core activity of bank liquidity creation increases failure probability. We test the HLCH in the context of Russian banking, where many failures occurred albeit not triggered by swings in business cycles or an exogenous shock such as a crisis. Using Berger and Bouwman (2009) liquidity creation measures, we find that high liquidity creation is associated with greater probability of bank failure and this finding survives multiple robustness checks. Our results suggest that regulatory authorities can mitigate systemic distress and reduce the costs to society from bank failures through early identification of high liquidity creators.

Keywords: Liquidity creation; Bank failures (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:57:y:2021:i:c:s1572308921000966

DOI: 10.1016/j.jfs.2021.100937

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