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Liquidity Creation and Trust Environment

Author

Listed:
  • Jérémie Bertrand

    (IESEG, School of Management)

  • Paul-Olivier Klein

    (Université Jean Moulin Lyon 3, Iaelyon School of Management, Magellan)

  • Jean-Loup Soula

    (University of Strasbourg)

Abstract

Trust towards banks plays a central role in theoretical literature. Diamond and Dybvig (J Polit Econ 91:401–419, 1983) argue that in a trustworthy environment banks can easily collect deposit foster banking activity and asset transformation. Diamond and Rajan (J Polit Econ 109:287–327, 2001) posit that a high trust environment discourages banks from creating liquidity. To address these conflicting views, the current study measures liquidity creation using Berger and Bouwman’s (Rev Financ Stud 22:3779–3837, 2009) methodology, then assesses the level of trust in the environment with four proxies and two additional instruments deployed in previous research. The results confirm a positive effect of trust in banks on liquidity creation, especially for small or state-chartered banks and during economic downturns. The results are robust to time effects and potential endogeneity concerns.

Suggested Citation

  • Jérémie Bertrand & Paul-Olivier Klein & Jean-Loup Soula, 2022. "Liquidity Creation and Trust Environment," Journal of Financial Services Research, Springer;Western Finance Association, vol. 62(3), pages 201-232, December.
    • Handle: RePEc:kap:jfsres:v:62:y:2022:i:3:d:10.1007_s10693-021-00353-0
    DOI: 10.1007/s10693-021-00353-0
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    More about this item

    Keywords

    Banking; Liquidity creation; Trust; Financial intermediation;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Z1 - Other Special Topics - - Cultural Economics

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