Cyclicality of bank liquidity creation

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Title: Cyclicality of bank liquidity creation
Author: Davydov, Denis ; Fungáčová, Zuzana ; Weill, Laurent
Series: Journal of International Financial Markets, Institutions and Money
Series volume: 55
Series number: July ; 2018
Year of publication: 2018
Publication date: 15.7.2018
Page range: 81-93
Subject (yso): pankit; suhdannevaihtelut; bruttokansantuote; talouskasvu; omistus
Keywords: likviditeetti; Venäjä; BKT; ulkomaiset pankit; valtion pankit; yksityiset pankit
JEL: G21
Other keywords: Bank; Liquidity creation; Business cycles; 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-owned 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 cyclicality of bank liquidity creation, liquidity creation behavior of banks can amplify business cycle fluctuations.

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