Bank capital and liquidity creation: Evidence from the Russian experience

Aleksei Gorodilov () and Vladimir Sokolov ()
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Aleksei Gorodilov: HSE University, Moscow
Vladimir Sokolov: HSE University, Moscow

Applied Econometrics, 2024, vol. 73, 35-58

Abstract: In this paper we examine the relationship between regulatory bank capital and liquidity creation. We test the “financial fragility-crowding out hypothesis” and the “risk absorption hypothesis” on the sample of 885 Russian banks over the 2010–2019 period. Inspired by Berger and Bouwmanʼs (2009) approach, we develop a liquidity creation measure that simultaneously considers the category and maturity of secondary accounts. After conducting several robustness checks, we report that bank capital is negatively related to liquidity creation which supports the “financial fragility-crowding out hypothesis”. We also show that this relationship is independent of the bank size and the economic cycle. Our findings suggest that the Central Bank of Russia faces a trade-off between financial stability and liquidity creation by the banking system, as tougher regulatory capital requirements decrease banks’ abilities to finance the real sector of the economy.

Keywords: liquidity creation; total capital ratio; the Russian banking system; Basel III (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2024
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