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How bank competition influence liquidity creation

Roman Horvath, Jakub Seidler and Laurent Weill ()

No 16/2013, BOFIT Discussion Papers from Bank of Finland, Institute for Economies in Transition

Abstract: This paper evaluates the effect of bank competition on liquidity creation by banks. Thus, we contribute to the literature on both bank competition and the determinants of liquidity creation by banks. To explore this relationship, we conduct dynamic GMM panel estimations on a dataset of Czech banks from 2002 to 2010. We find that enhanced competition reduces liquidity creation, a finding we observe under different specifications, including alternative measures of liquidity creation. We explain this finding in terms of the impact of increased bank competition on the financial fragility of banks, which leads banks to reduce their lending and deposit activities. The evidence suggests that pro-competitive policies in the banking industry can reduce liquidity provision by banks. JEL Codes: G21. Keywords: bank competition, liquidity creation.

JEL-codes: G21 (search for similar items in EconPapers)
Date: 2013-06-25
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Published in Published in Economic Modelling, Volume 52, Part A, January 2016, Pages 155–161. Special Issue on Recent Developments in Decision-Making, Monetary Policy and Financial Markets.

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