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Competition and Bank Liquidity Creation

Author

Listed:
  • Jiang, Liangliang
  • Levine, Ross
  • Lin, Chen

Abstract

We use a new identification strategy to assess whether an intensification of competition among banks increases or decreases the provision of a key banking service: liquidity creation. Although theory offers conflicting predictions about the impact of competition on liquidity creation, we find that regulatory-induced competition reduces liquidity creation. Consistent with a subset of models emphasizing that banks pushed toward insolvency reduce risk-taking activities, we discover that regulatory-induced competition reduces liquidity creation more among banks with less risk-absorbing capacity (e.g., less profitable banks).

Suggested Citation

  • Jiang, Liangliang & Levine, Ross & Lin, Chen, 2019. "Competition and Bank Liquidity Creation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 54(2), pages 513-538, April.
    • Handle: RePEc:cup:jfinqa:v:54:y:2019:i:02:p:513-538_00
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    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
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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