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Liquidity Creation and Bank Capital

  • Barbara Casu
  • Filippo di Pietro
  • Antonio Trujillo-PonceEmail author
Article

Abstract

This paper aims to evaluate the relationship between capital and liquidity creation following the implementation of the Basel III rules. These regulatory measures target both increased capital ratios and a reduction of banks’ maturity transformation risk, which could result in excessive constraints on bank liquidity creation, thereby negatively affecting economic growth. Using a simultaneous equation model, we find a bi-causal negative relationship, which suggests that banks may reduce liquidity creation as capital increases; and when liquidity creation increases, banks reduce capital ratios. Our results therefore imply a trade-off between financial stability (higher capital, reduced risk) and economic growth (liquidity creation).

Keywords

Bank capital Liquidity creation Illiquidity Net stable funding ratio Basel III Eurozone banking system 

JEL Classification

G21 G28 

Notes

Acknowledgments

We are grateful to the participants of the 2016 Portsmouth-Fordham Conference on Banking and Finance (United Kingdom), the 2017 Javeriana University International Symposium of Experts in Finance (Colombia) and the 2017 Financial Intermediation Network of European Studies (FINEST) Conference (Italy) for their valuable comments. Special thanks are due to the anonymous referee and the editors for their guidance and very constructive remarks and suggestions. Part of this paper was written while Antonio Trujillo-Ponce was visiting Cass Business School (City, University of London). We also acknowledge the financial support of the Regional Government of Andalusia, Spain (Research Group SEJ-555). The usual disclaimer applies.

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Cass Business SchoolCity, University of LondonLondonUK
  2. 2.Department of Financial Economics and Operations ManagementUniversidad de SevillaSevilleSpain
  3. 3.Department of Financial Economics and AccountingUniversidad Pablo de OlavideSevilleSpain

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