Liquidity Creation and Trust Environment

Jérémie Bertrand, Paul-Olivier Klein () and Jean-Loup Soula ()
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Jérémie Bertrand: IESEG, School of Management
Paul-Olivier Klein: Université Jean Moulin Lyon 3, Iaelyon School of Management, Magellan
Jean-Loup Soula: University of Strasbourg

Journal of Financial Services Research, 2022, vol. 62, issue 3, No 3, 232 pages

Abstract: 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)
JEL-codes: G21 G32 Z1 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s10693-021-00353-0

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