The Bank Liquidity Creation and Equity Capital Puzzle

Allen Berger, Jiarui Guo, Xinming Li, Aluna Wang and Wenting Wang
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Aluna Wang: HEC Paris - Ecole des Hautes Etudes Commerciales

Working Papers from HAL

Abstract: We revisit the bank capital-liquidity creation debate using quarterly US bank data for 20 years from 2003:Q1-2022:Q4, investigating for first time how relations differ for bank outputs versus inputs and for major outputs and inputs. We find a negative overall relation between capital and liquidity creation for small banks, consistent with the Financial Fragility-Crowding Out (FFCO) Hypothesis and a positive relation for large banks, consistent with the Risk Absorption (RA) Hypothesis. Key contributions are that we find much of the explanation of the size-class difference lies in the different effects for outputs versus inputs and for major outputs and inputs.

Keywords: bank liquidity creation; bank equity capital; banks (search for similar items in EconPapers)
Date: 2025-08-07
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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-05384762

DOI: 10.2139/ssrn.5381609

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