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How bank competition influence liquidity creation

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  • Horvath, Roman
  • Seidler, Jakub
  • Weill, Laurent

Abstract

This paper evaluates the effect of bank competition on liquidity creation by banks. Thus, we contribute to the literature on both bank competition and the determinants of liquidity creation by banks. To explore this relationship, we conduct dynamic GMM panel estimations on a dataset of Czech banks from 2002 to 2010. We find that enhanced competition reduces liquidity creation, a finding we observe under different specifications, including alternative measures of liquidity creation. We explain this finding in terms of the impact of increased bank competition on the financial fragility of banks, which leads banks to reduce their lending and deposit activities. The evidence suggests that pro-competitive policies in the banking industry can reduce liquidity provision by banks. JEL Codes: G21. Keywords: bank competition, liquidity creation.

Suggested Citation

  • Horvath, Roman & Seidler, Jakub & Weill, Laurent, 2013. "How bank competition influence liquidity creation," BOFIT Discussion Papers 16/2013, Bank of Finland, Institute for Economies in Transition.
  • Handle: RePEc:bof:bofitp:2013_016
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Jana Lastuvkova, 2014. "Liquidity management strategies in the Czech banking sector," MENDELU Working Papers in Business and Economics 2014-47, Mendel University in Brno, Faculty of Business and Economics.
    2. Tomás Gómez Rodríguez & Humberto Ríos Bolívar & Adriana Zambrano Reyes, 2018. "Competencia y estructura de mercado del sector bancario en México," Contaduría y Administración, Accounting and Management, vol. 63(1), pages 3-4, Enero - M.
    3. Jana Laštůvková, 2016. "Liquidity Determinants of the Selected Banking Sectors and their Size Groups," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 64(3), pages 971-978.
    4. Gaspar Núñez Rodríguez, 2018. "Matriz de contabilidad social y análisis de sectores productivos en México," Contaduría y Administración, Accounting and Management, vol. 63(1), pages 7-8, Enero - M.
    5. Grover, Naina & Sinha, Pankaj, 2019. "Determinants, Persistence and value implications of liquidity creation: An evidence from Indian Banks," MPRA Paper 94280, University Library of Munich, Germany.
    6. Gao, Bo & Li, Junjiang & Shi, Benye & Wang, Xiaojuan, 2020. "Internal conflict and Bank liquidity creation: Evidence from the belt and Road initiative," Research in International Business and Finance, Elsevier, vol. 53(C).
    7. Badarau, Cristina & Lapteacru, Ion, 2020. "Bank risk, competition and bank connectedness with firms: A literature review," Research in International Business and Finance, Elsevier, vol. 51(C).
    8. Tran, Dung Viet, 2020. "Bank business models and liquidity creation," Research in International Business and Finance, Elsevier, vol. 53(C).
    9. Tomás Gómez Rodríguez & Humberto Ríos Bolívar & Adriana Zambrano Reyes, 2018. "Competition and market structure of the banking sector in Mexico," Contaduría y Administración, Accounting and Management, vol. 63(1), pages 5-6, Enero - M.
    10. Hou, Xiaohui & Li, Shuo & Li, Wanli & Wang, Qing, 2018. "Bank diversification and liquidity creation: Panel Granger-causality evidence from China," Economic Modelling, Elsevier, vol. 71(C), pages 87-98.
    11. Nguyen, My & Perera, Shrimal & Skully, Michael, 2017. "Bank market power, asset liquidity and funding liquidity: International evidence," International Review of Financial Analysis, Elsevier, vol. 54(C), pages 23-38.
    12. Acosta-Smith, Jonathan & Arnould, Guillaume & Milonas, Kristoffer & Vo, Quynh-Anh, 2019. "Capital and liquidity interaction in banking," Bank of England working papers 840, Bank of England, revised 22 Jun 2020.
    13. Ardekani, Aref Mahdavi & Distinguin, Isabelle & Tarazi, Amine, 2020. "Do banks change their liquidity ratios based on network characteristics?," European Journal of Operational Research, Elsevier, vol. 285(2), pages 789-803.
    14. Barbara Casu & Filippo Pietro & Antonio Trujillo-Ponce, 2019. "Liquidity Creation and Bank Capital," Journal of Financial Services Research, Springer;Western Finance Association, vol. 56(3), pages 307-340, December.
    15. Jana Lastuvkova, 2015. "Determinants of the Slovak bank liquidity flows," MENDELU Working Papers in Business and Economics 2015-51, Mendel University in Brno, Faculty of Business and Economics.
    16. Aysun, Uluc, 2018. "The effects of global bank competition and presence on local economies: The Goldilocks principle may not apply to global banking," Economic Modelling, Elsevier, vol. 70(C), pages 159-173.

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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