Journal of Financial and Quantitative Analysis Vol. 54 No. 2 2019

Competition and Bank Liquidity Creation

Liangliang Jiang^1,2,3,4,5,6; Ross Levine^1,2,3,4,5,6; Chen Lin^1,2,3,4,5,6

¹ Hong Kong Polytechnic University · ² The University of Melbourne · ³ The Polytechnic University of Japan · ⁴ University of Hong Kong · ⁵ London School of Economics and Political Science · ⁶ University of California, Berkeley

Abstract

We use a new identification strategy to assess whether an intensification of competition among banks increases or decreases the provision of a key banking service: liquidity creation. Although theory offers conflicting predictions about the impact of competition on liquidity creation, we find that regulatory-induced competition reduces liquidity creation. Consistent with a subset of models emphasizing that banks pushed toward insolvency reduce risk-taking activities, we discover that regulatory-induced competition reduces liquidity creation more among banks with less risk-absorbing capacity (e.g., less profitable banks).

DOI

10.1017/s0022109018000820

Volume

54

Issue

2

Pages

513-538

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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