Cyclicality of bank liquidity creation

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Title: Cyclicality of bank liquidity creation
Author: Davydov, Denis ; Fungáčová, Zuzana ; Weill, Laurent
Organization: Bank of Finland
Department / Unit: Institute for Economies in Transition (BOFIT)
Series: BOFIT Discussion Papers
Series number: 5/2017
Year of publication: 2017
Publication date: 10.3.2017
Published in: Published in Journal of International Financial Markets, Institutions & Money, 55, July, 2018, 81–93
Pages: 29
Subject (yso): pankit
Keywords: Bofit-kokoelma; likviditeetti; Venäjä; pankkitoiminta; suhdanteet; ulkomaiset pankit; yksityispankit; valtion omistamat pankit
JEL: G21
Other keywords: liquidity creation; bank; state ownership
Abstract: This paper investigates the cyclicality of bank liquidity creation. Since liquidity creation is a major economic function of banks, their liquidity creation behavior may amplify business cycle fluctuations. Using the methodology of Berger and Bouwman (2009) to compute liquidity creation measures, we analyze the relation between GDP growth and liquidity creation of Russian banks from 2004 to 2015. Detailed quarterly data on a very large sample of banks and coexistence of different bank ownership types (state-owned, domestic private and foreign banks), makes Russia an ideal natural laboratory for study of cyclicality of liquidity creation for banks. We find that liquidity creation of banks is procyclical. We show that the liquidity creation behavior of state-owned banks and foreign banks is similar to that of domestic private banks in terms of procyclicality. We further find that the magnitude of procyclicality is higher for liquidity creation than for lending. Thus, while ownership of banks does not influence the liquidity creation behavior of banks, such behavior can amplify business cycle fluctuations.
Table of contents: Abstract 4 1 Introduction 5 2 Related literature 6 3 Data and methodology 8 3.1 Data description 8 3.2 Liquidity creation measures 8 3.3 Methodology 11 4 Results 12 4.1 Main estimations 12 4.2 Robustness checks 14 5 Cyclicality of liquidity creation vs. cyclicality of lending 15 6 Conclusions 17 References 18 Tables 20

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