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Bank Capital and Liquidity Creation : Granger Causality Evidence

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  • Roman Horváth

    ()
    (Charles University, Prague and IOS, Regensburg)

  • Jakub Seidler
  • Laurent Weill

Abstract

This paper examines the relationship between capital and liquidity creation. This issue is of interest to determine the potential impact of tighter capital requirements such as those involved in Basel III reforms on liquidity creation. We perform Granger-causality tests in a dynamic GMM panel estimator framework on an exhaustive dataset of Czech banks from 2000 to 2010. We observe a strong expansion of liquidity creation during the full period, which was slowed by the financial crisis, and was mainly driven by large banks. We show that capital is found to negatively Granger-cause liquidity creation but also observe that liquidity creation Granger-causes capital reduction. These findings support the view that Basel III reforms can reduce liquidity creation, but also that greater liquidity creation can have a detrimental impact by reducing bank solvency. We thus show that there is a trade-off between the benefits of financial stability induced by stronger capital requirements and those of increased liquidity creation.

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Bibliographic Info

Paper provided by Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies) in its series Working Papers with number 318.

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Length: 40
Date of creation: Jul 2012
Date of revision:
Handle: RePEc:ost:wpaper:318

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Keywords: bank capital; liquidity creation;

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  1. Anca Pruteanu-Podpiera & Laurent Weill & Franziska Schobert, 2008. "Banking Competition and Efficiency: A Micro-Data Analysis on the Czech Banking Industry," Comparative Economic Studies, Palgrave Macmillan, vol. 50(2), pages 253-273, June.
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  3. Allen N. Berger & Christa H. S. Bouwman, 2009. "Bank Liquidity Creation," Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3779-3837, September.
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  6. Patrick Slovik & Boris Cournède, 2011. "Macroeconomic Impact of Basel III," OECD Economics Department Working Papers 844, OECD Publishing.
  7. Jirí Podpiera & Laurent Weill, 2008. "Bad luck or bad management? emerging banking market experience," ULB Institutional Repository 2013/14305, ULB -- Universite Libre de Bruxelles.
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  15. Fungacova, Zuzana & Weill, Laurent & Zhou, Mingming, 2010. "Bank capital, liquidity creation and deposit insurance," BOFIT Discussion Papers 17/2010, Bank of Finland, Institute for Economies in Transition.
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Citations

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Cited by:
  1. Jose Peydro Alcalde & Sona Benecka & Alexis Derviz & Adam Gersl & Tomas Holub & Roman Horvath & Petr Jakubik & Narcisa Liliana Kadlcakova & Dorota Kowalczyk & Ivana Kubicova & Steven Ongena & Jakub Ry, 2012. "Financial Stability and Monetary Policy," Occasional Publications - Edited Volumes, Czech National Bank, Research Department, edition 2, volume 10, number rb10/2 edited by Jan Babecky & Roman Horvath.
  2. Distinguin, Isabelle & Roulet, Caroline & Tarazi, Amine, 2013. "Bank regulatory capital and liquidity: Evidence from US and European publicly traded banks," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3295-3317.
  3. Robert Ambrisko & Vitezslav Augusta & Jan Babecky & Michal Franta & Dana Hajkova & Petr Kral & Jan Libich & Pavla Netusilova & Milan Rikovsky & Jakub Rysanek & Pavel Soukup & Petr Stehlik & Vilem Vale, 2013. "Macroeconomic Effects of Fiscal Policy," Occasional Publications - Edited Volumes, Czech National Bank, Research Department, edition 2, volume 11, number rb11/2 edited by Jan Babecky & Kamil Galuscak.
  4. Horvath, Roman & Seidler, Jakub & Weill, Laurent, 2013. "How bank competition influence liquidity creation," BOFIT Discussion Papers 16/2013, Bank of Finland, Institute for Economies in Transition.
  5. Sophocles Vogiazas & Constantinos Alexiou, 2013. "Liquidity And The Business Cycle: Empirical Evidence From The Greek Banking Sector," Economic Annals, Faculty of Economics, University of Belgrade, vol. 58(199), pages 109-126, October -.
  6. Jaromir Baxa & Michal Franta & Tomas Havranek & Roman Horvath & Miroslav Plasil & Marek Rusnak & Borek Vasicek, 2013. "Transmission of Monetary Policy," Occasional Publications - Edited Volumes, Czech National Bank, Research Department, edition 1, volume 11, number rb11/1 edited by Jan Babecky & Roman Horvath.

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