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Bank liquidity creation and recessions

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  • Chatterjee, Ujjal K.

Abstract

We investigate the relationship between bank liquidity creation and recessions in the U.S. For the 1984–2010 sample, we find that (i) lower bank on-balance sheet liquidity creation signals recessions four quarters into the future; (ii) off-balance sheet liquidity creation is not a robust predictor of recessions at longer forecast horizons; (iii) off-balance sheet liquidity creation falls in tandem with on-balance sheet liquidity creation one quarter prior to recessions, and aggregate, on- and off-balance sheet bank liquidity creation continue to decline during and up to five quarters after recessions; and (iv) liquidity creation of larger banks contains more information about future recessions than that of smaller ones.

Suggested Citation

  • Chatterjee, Ujjal K., 2018. "Bank liquidity creation and recessions," Journal of Banking & Finance, Elsevier, vol. 90(C), pages 64-75.
  • Handle: RePEc:eee:jbfina:v:90:y:2018:i:c:p:64-75
    DOI: 10.1016/j.jbankfin.2018.03.002
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    Cited by:

    1. Duan, Ying & Niu, Jijun, 2020. "Liquidity creation and bank profitability," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
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    4. Zheng, Chen & (Wai Kong) Cheung, Adrian & Cronje, Tom, 2019. "The moderating role of capital on the relationship between bank liquidity creation and failure risk," Journal of Banking & Finance, Elsevier, vol. 108(C).

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    More about this item

    Keywords

    Treasury yield curve; Bank liquidity creation; Recessions; Financial stability; Monetary Policy;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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