Bank liquidity creation, network contagion and systemic risk: Evidence from Chinese listed banks
We examine the impact of bank liquidity creation on systemic risk and its heterogeneous impact over the network connectedness. We find that excessive liquidity creation increases the systemic risk with a “U shape” relationship, while internal and external liquidity creation drives systemic risk in a different way. Network connectedness of banks strengthens the relationship between liquidity creation and systemic risk. Our results provide supporting evidence on regulating bank liquidity creation to enhance the financial stability.