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Liquidity Creation and Bank Capital

Author

Listed:
  • Barbara Casu

    (City, University of London)

  • Filippo Pietro

    (Universidad de Sevilla)

  • Antonio Trujillo-Ponce

    (Universidad Pablo de Olavide)

Abstract

This paper aims to evaluate the relationship between capital and liquidity creation following the implementation of the Basel III rules. These regulatory measures target both increased capital ratios and a reduction of banks’ maturity transformation risk, which could result in excessive constraints on bank liquidity creation, thereby negatively affecting economic growth. Using a simultaneous equation model, we find a bi-causal negative relationship, which suggests that banks may reduce liquidity creation as capital increases; and when liquidity creation increases, banks reduce capital ratios. Our results therefore imply a trade-off between financial stability (higher capital, reduced risk) and economic growth (liquidity creation).

Suggested Citation

  • Barbara Casu & Filippo Pietro & Antonio Trujillo-Ponce, 2019. "Liquidity Creation and Bank Capital," Journal of Financial Services Research, Springer;Western Finance Association, vol. 56(3), pages 307-340, December.
    • Handle: RePEc:kap:jfsres:v:56:y:2019:i:3:d:10.1007_s10693-018-0304-y
    DOI: 10.1007/s10693-018-0304-y
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    10. Gupta, Juhi & Kashiramka, Smita & Ly, Kim Cuong & Pham, Ha, 2023. "The interrelationship between bank capital and liquidity creation: A non-linear perspective from the Asia-Pacific region," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 793-820.
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    More about this item

    Keywords

    Bank capital; Liquidity creation; Illiquidity; Net stable funding ratio; Basel III; Eurozone banking system;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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