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Bank Liquidity Creation and Regulatory Capital in Asia Pacific

In: Bank Competition, Efficiency and Liquidity Creation in Asia Pacific

Author

Listed:
  • Xiaoqing Maggie Fu

    (University of Macau)

  • Yongjia Rebecca Lin

    (Macau University of Science and Technology)

  • Philip Molyneux

    (Bangor University)

Abstract

According to the modern theory of financial intermediation, one of the two central roles played by banks is liquidity creation. Bryant (1980) and Diamond and Dybvig (1983) suggest that banks create liquidity on the balance sheet by financing relatively long-term illiquid assets with relatively short-term liquid liabilities. Holmstrom and Tirole (1998) and Kashyap et al. (2002) argue that banks also create liquidity off-balance sheet by offering loan commitments and generating similar claims to liquid funds. Therefore, banks hold illiquid assets/loan commitments and provide liquidity to stimulate the rest of the economy. Such a liquidity creation function attracted significant attention recently because the global financial crisis of 2008–09 vividly demonstrated that illiquidity can dramatically affect macroeconomic stability. As an outcome, one major regulatory response has been the introduction of Basel III that introduces higher liquidity and capital standards with the goal of promoting a more resilient banking sector (BIS, 2011).

Suggested Citation

  • Xiaoqing Maggie Fu & Yongjia Rebecca Lin & Philip Molyneux, 2015. "Bank Liquidity Creation and Regulatory Capital in Asia Pacific," Palgrave Macmillan Studies in Banking and Financial Institutions, in: Bank Competition, Efficiency and Liquidity Creation in Asia Pacific, chapter 5, pages 96-124, Palgrave Macmillan.
    • Handle: RePEc:pal:pmschp:978-1-137-53384-5_5
    DOI: 10.1057/9781137533845_5
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    Citations

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    Cited by:

    1. Chen, Ting-Hsuan & Shen, Chung-Hua & Wu, Meng-Wen & Huang, Kuo-Jui, 2021. "Effect of shadow banking on the relation between capital and liquidity creation," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 166-184.
    2. Anas Alaoui Mdaghri & Lahsen Oubdi, 2022. "Bank-Specific and Macroeconomic Determinants of Bank Liquidity Creation: Evidence from MENA Countries," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 11(2), pages 55-76.
    3. Carmela D’Avino & Eric Girardin & Mimoza Shabani, 2022. "Bank liquidity creation: A new global dataset for developing and emerging countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 158(2), pages 529-570, May.
    4. Grover, Naina & Sinha, Pankaj, 2019. "Determinants, Persistence and value implications of liquidity creation: An evidence from Indian Banks," MPRA Paper 94280, University Library of Munich, Germany.

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