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The Bank Liquidity Creation and Equity Capital Puzzle

Author

Listed:
  • Allen Berger
  • Jiarui Guo
  • Xinming Li
  • Aluna Wang

    (HEC Paris - Ecole des Hautes Etudes Commerciales)

  • Wenting Wang

Abstract

We revisit the bank capital-liquidity creation debate using quarterly US bank data for 20 years from 2003:Q1-2022:Q4, investigating for first time how relations differ for bank outputs versus inputs and for major outputs and inputs. We find a negative overall relation between capital and liquidity creation for small banks, consistent with the Financial Fragility-Crowding Out (FFCO) Hypothesis and a positive relation for large banks, consistent with the Risk Absorption (RA) Hypothesis. Key contributions are that we find much of the explanation of the size-class difference lies in the different effects for outputs versus inputs and for major outputs and inputs.

Suggested Citation

  • Allen Berger & Jiarui Guo & Xinming Li & Aluna Wang & Wenting Wang, 2025. "The Bank Liquidity Creation and Equity Capital Puzzle," Working Papers hal-05384762, HAL.
    • Handle: RePEc:hal:wpaper:hal-05384762
    DOI: 10.2139/ssrn.5381609
    as

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