Liquidity Creation and Trust Environment

Jérémie Bertrand, Jean-Loup Soula () and Paul-Olivier Klein ()
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Jérémie Bertrand: IÉSEG School Of Management [Puteaux]
Jean-Loup Soula: EM Strasbourg - École de Management de Strasbourg = EM Strasbourg Business School
Paul-Olivier Klein: MAGELLAN - Laboratoire de Recherche Magellan - UJML - Université Jean Moulin - Lyon 3 - Université de Lyon - Institut d'Administration des Entreprises (IAE) - Lyon

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Abstract: Trust towards banks plays a central role in theoretical literature. Diamond and Dybvig (1983) argue that in a trustworthy environment banks can easily collect deposit foster banking activity and asset transformation. Diamond and Rajan (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 (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)
Date: 2022-12
New Economics Papers: this item is included in nep-fdg and nep-soc
Note: View the original document on HAL open archive server: https://univ-lyon3.hal.science/hal-03955028v1
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Published in Journal of Financial Services Research, 2022, 62 (3), pp.201-232. ⟨10.1007/s10693-021-00353-0⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03955028

DOI: 10.1007/s10693-021-00353-0

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