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Liquidity: How Banks Create It and How It Should Be Regulated

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  • Bouwman, Christa H. S.

    (Case Western Reserve University and Wharton Financial Institutions Center, University of Pennsylvania)

Abstract

Liquidity creation is a core function of banks and an economic service of substantial importance to the economy. This chapter reviews and synthesizes the theoretical and empirical literature on bank liquidity creation. The focus is on the economics of bank liquidity creation, both in the traditional relationship banking context and in the shadow banking context. The related prudential regulation issues--pertaining mainly to capital requirements and liquidity requirements--are also discussed. A historical overview is provided, starting in the early 1800s and ending with Basel III and the Dodd- Frank Act. Open research questions are identified.

Suggested Citation

  • Bouwman, Christa H. S., 2013. "Liquidity: How Banks Create It and How It Should Be Regulated," Working Papers 13-32, University of Pennsylvania, Wharton School, Weiss Center.
  • Handle: RePEc:ecl:upafin:13-32
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    Cited by:

    1. Itzhak Ben-David & Ajay Palvia & Chester Spatt, 2015. "Banks’ Internal Capital Markets and Deposit Rates," NBER Working Papers 21526, National Bureau of Economic Research, Inc.
    2. Jalali Farahani , Alireza & Sargolzaee , Mostafa & Dehghan Nayeri , Leila & Ghaffari Nejad , Amir Hossein, 2020. "Effects of Capital Raising on Liquidity Creation and Credit in the Banking System of Iran," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 15(1), pages 101-121, January.
    3. Simas Kucinskas, 2015. "Liquidity Creation without Banks," Tinbergen Institute Discussion Papers 15-101/VI, Tinbergen Institute.
    4. Horvath, Roman & Seidler, Jakub & Weill, Laurent, 2016. "How bank competition influences liquidity creation," Economic Modelling, Elsevier, vol. 52(PA), pages 155-161.
    5. Simas Kucinskas, 2015. "Liquidity creation without banks," DNB Working Papers 482, Netherlands Central Bank, Research Department.
    6. Christopher Hoag, 2019. "Liquidity and Borrowing from a Lender of Last Resort during the Crisis of 1884," Working Papers 1901, Trinity College, Department of Economics, revised Jul 2019.
    7. Schmitt, Matthias & Schmaltz, Christian, 2016. "Potential implications of a NSFR on German banks' credit supply and profitability," Discussion Papers 37/2016, Deutsche Bundesbank.
    8. Simas Kucinskas, 2015. "Aggregate Risk and Efficiency of Mutual Funds," Tinbergen Institute Discussion Papers 15-113/VI, Tinbergen Institute.
    9. Heidorn, Thomas & Buschmann, Christian, 2014. "The liquidity reserve funding and management strategies," Frankfurt School - Working Paper Series 210, Frankfurt School of Finance and Management.
    10. Muhammad Saifuddin Khan, 2018. "The Role of Liquidity in Financial Intermediation," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2018.
    11. Dan Costin NIŢESCU & Florin Alexandru DUNA, 2018. "A Multifactorial Analysis of Bank Liquidity in the Euro Area," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 153-167, September.
    12. Kučinskas, Simas, 2019. "Aggregate risk and efficiency of mutual funds," Journal of Banking & Finance, Elsevier, vol. 101(C), pages 1-11.
    13. Dan Costin NIÞESCU & Florin Alexandru DUNA, 2017. "Liquidity - A Changing Concept, Within The Post Crisis Environment," REVISTA DE MANAGEMENT COMPARAT INTERNATIONAL/REVIEW OF INTERNATIONAL COMPARATIVE MANAGEMENT, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 18(4), pages 421-443, October.

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