Liquidity Creation and Bank Capital

Barbara Casu (), Filippo Pietro () and Antonio Trujillo-Ponce
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Barbara Casu: City, University of London
Filippo Pietro: Universidad de Sevilla

Journal of Financial Services Research, 2019, vol. 56, issue 3, No 4, 307-340

Abstract: Abstract This paper aims to evaluate the relationship between capital and liquidity creation following the implementation of the Basel III rules. These regulatory measures target both increased capital ratios and a reduction of banks’ maturity transformation risk, which could result in excessive constraints on bank liquidity creation, thereby negatively affecting economic growth. Using a simultaneous equation model, we find a bi-causal negative relationship, which suggests that banks may reduce liquidity creation as capital increases; and when liquidity creation increases, banks reduce capital ratios. Our results therefore imply a trade-off between financial stability (higher capital, reduced risk) and economic growth (liquidity creation).

Keywords: Bank capital; Liquidity creation; Illiquidity; Net stable funding ratio; Basel III; Eurozone banking system (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (20)

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DOI: 10.1007/s10693-018-0304-y

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