Should we be afraid of powerful banks? The trade-off between bank power and liquidity buffer

In recent years we have observed a significant increase in bank market power worldwide. On the one hand, powerful banks may manage their financial positions more safely to be able to benefit from their position at any time. On the other hand, such banks might explore their power at their own advantage and manage their capital more aggressively exerting typical moral hazard behaviour. In this paper, we analyse how powerful banks manage their liquidity. The results indicate that powerful banks use their power and keep lower liquidity buffers, all else being equal. Though the result is highly significant in developed countries and normal times, it is less marked in emerging countries and during crisis periods. We argue that bank power should be considered as an important factor in banking supervision and regulatory models on liquidity buffers.