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The role of governance on bank liquidity creation

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  • Díaz, Violeta
  • Huang, Ying

Abstract

This paper examines the impact of internal bank governance on bank liquidity creation in the U.S. before, during and after the 2007–2009 financial crisis. Using bank holding company level data, we analyze whether better-governed banks create higher levels of liquidity. We find that this effect is positive and significant but only for large bank holding companies. Further analysis reveals that specific internal governance categories: CEO education, compensation structure, progressive practices, and ownership have a significant effect on bank liquidity. However, this positive effect occurs mostly during the crisis period, and for large banks that are also high liquidity creators. Finally, we find that the effect of governance on liquidity creation increases during the crisis period. These findings are robust even while controlling for liquidity measures, bank size, and endogeneity problems between governance and liquidity creation.

Suggested Citation

  • Díaz, Violeta & Huang, Ying, 2017. "The role of governance on bank liquidity creation," Journal of Banking & Finance, Elsevier, vol. 77(C), pages 137-156.
    • Handle: RePEc:eee:jbfina:v:77:y:2017:i:c:p:137-156
    DOI: 10.1016/j.jbankfin.2017.01.003
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    More about this item

    Keywords

    Liquidity creation; Governance; Crisis; Bank holding companies; Compensation;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G01 - Financial Economics - - General - - - Financial Crises

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