Liquidity Creation, Bank Competition and Revenue Diversification

Vuong Thao Tran and Hoa Nguyen
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Vuong Thao Tran: School of Economics, Finance and Marketing, RMIT University, 124 La Trobe St, Melbourne VIC 3000, Australia
Hoa Nguyen: Department of Finance, Deakin University, Melbourne, 221 Burwood Highway, Burwood, Victoria 3125, Australia

Quarterly Journal of Finance (QJF), 2023, vol. 13, issue 03, 1-45

Abstract: We examine the individual and joint effects of bank competition and revenue diversification on liquidity creation. We find that bank competition and revenue diversification have a positive impact on banks’ propensity to create liquidity. Competition appears to primarily impact on-balance-sheet liquidity creation while revenue diversification is a key driver of off-balance-sheet liquidity creation. When considered together, each has a moderating effect on the other in relation to liquidity creation suggesting a substitution effect between competition and revenue diversification. Such substitution effect, however, is found predominantly for small and medium banks and during crisis periods. Our findings suggest that policymakers and regulators should be cautious of a one-size-fits-all approach to bank competition and revenue diversification in promoting bank stability.

Keywords: Liquidity creation; competition; revenue diversification; liquidity risk (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1142/S2010139223500076

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