The effect of liquidity creation on systemic risk: evidence from European banking sector

Waël Louhichi (), Nadia Saghi-Zedek (), Zainab Srour and Jean-Laurent Viviani ()
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Waël Louhichi: ESSCA - ESSCA – École supérieure des sciences commerciales d'Angers = ESSCA Business School
Nadia Saghi-Zedek: CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique
Zainab Srour: CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique, EDST - Ecole Doctorale des Sciences et de la Technologie - LU / ULB - الجامعة اللبنانية [بيروت] = Lebanese University [Beirut] = Université libanaise [Beyrouth]
Jean-Laurent Viviani: CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique

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Abstract: The goal of this paper is to examine the effect of high liquidity creation on systemic risk. We use a hand-collected dataset on 94 banks from 16 Western European countries over the 2004-2020 period, including the crisis (2008-2009) period and sound periods (2004-2007 and 2010-2020). We assess banks' systemic risk using two different proxies: banks' systemic risk exposure, measured by the marginal expected shortfall (MES), and banks' systemic risk contribution, measured by the delta conditional value at risk (ACoVaR). Based on panel regressions, our results mainly show that, during calm periods, high liquidity creation is associated with high systemic risk exposure. Moreover, we show that the effect of liquidity creation on banks' systemic risk exposure is stronger during turmoil periods. Interestingly, our results show that banks' liquidity creation increases the systemic contribution only during the financial crisis of 2008-2009. Our findings contribute to the literature and the regulatory debate by suggesting that regulators should pay more attention to high liquidity-creating banks as they may cause aggregate financial fragility.

Keywords: Systemic risk; Liquidity creation; Fire sale; MES; Delta CoVaR (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

Published in Annals of Operations Research, 2022, ⟨10.1007/s10479-022-04836-8⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03775358

DOI: 10.1007/s10479-022-04836-8

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