Liquidity Creation and Bank Capital

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


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).


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

JEL Classification

G21 G28 



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.


  1. Acharya VV, Naqvi H (2012) The seeds of a crisis: a theory of bank-liquidity and risk-taking over the business cycle. J Financ Econ 106:349–366CrossRefGoogle Scholar
  2. Acharya VV, Viswanathan SV (2011) Leverage, moral hazard, and liquidity. J Financ 66:99–138CrossRefGoogle Scholar
  3. Allen F, Gale D (2004) Financial intermediaries and markets. Econometrica 72:1023–1061CrossRefGoogle Scholar
  4. Altunbas Y, Carbó S, Gardener EPM, Molyneux P (2007) Examining the relationships between capital, risk and efficiency in European banking. Eur Financ Manag 13:49–70CrossRefGoogle Scholar
  5. Ayuso J, Pérez D, Saurina J (2004) Are capital buffers pro-cyclical? Evidence from Spanish panel data. J Financ Intermed 13:249–264CrossRefGoogle Scholar
  6. Bain JS (1959) Industrial organization: a treatise. Wiley, New YorkGoogle Scholar
  7. Barth JR, Caprio G Jr, Levine R (2001) The regulation and supervision of banks around the world: a new database. Policy Research Working Paper 2588. World BankGoogle Scholar
  8. Barth JR, Caprio G Jr, Levine R (2013) Bank regulation and supervision in 180 countries from 1999 to 2011. J Financ Econ Policy 5:111–219CrossRefGoogle Scholar
  9. Basel Committee on Banking Supervision (BCBS) (2010) Basel III: a global regulatory framework for more resilient banks and banking systems. Bank for International Settlements, DecemberGoogle Scholar
  10. Basel Committee on Banking Supervision (BCBS) (2013) Basel III: the liquidity coverage ratio and liquidity risk monitoring tools. Bank for International Settlements, JanuaryGoogle Scholar
  11. Basel Committee on Banking Supervision (BCBS) (2014) Basel III: the net stable funding ratio. Bank for International Settlements, OctoberGoogle Scholar
  12. Baselga-Pascual L, Trujillo-Ponce A, Cardone-Riportella C (2015) Factors influencing bank risk in Europe: evidence from the financial crisis. N Am J Econ Financ 34:138–166CrossRefGoogle Scholar
  13. Belsley D, Kuh E, Welsch R (1980) Regression diagnostics: identifying influential data and sources of collinearity. Wiley, New YorkCrossRefGoogle Scholar
  14. Berger AN, Bouwman CHS (2009) Bank liquidity creation. Rev Financ Stud 22:3779–3837CrossRefGoogle Scholar
  15. Berger AN, Bouwman CHS (2016) Bank liquidity creation and financial crisis. ElsevierGoogle Scholar
  16. Berger AN, Bouwman CHS (2017) Bank liquidity creation, monetary policy, and financial crises. J Financ Stab 30:139–155CrossRefGoogle Scholar
  17. Berger AN, Sedunov J (2017) Bank liquidity creation and real economic output. J Bank Financ 81:1–19CrossRefGoogle Scholar
  18. Berger AN, Udell GF (1994) Did risk-based capital allocate bank credit and cause a “credit crunch” in the United States? J Money Credit Bank 26:585–628CrossRefGoogle Scholar
  19. Berger AN, Herring R, Szegö G (1995) The role of capital in financial institutions. J Bank Financ 19:393–430CrossRefGoogle Scholar
  20. Boyd JH, Prescott EC (1986) Financial intermediary coalitions. J Econ Theory 38:211–232CrossRefGoogle Scholar
  21. Brewer E III, Kaufman GG, Wall LD (2008) Bank capital ratios across countries: why do they vary? J Financ Serv Res 34:177–201CrossRefGoogle Scholar
  22. Bryant J (1980) A model of reserves, bank runs and deposit insurance. J Bank Financ 4:335–344CrossRefGoogle Scholar
  23. Canales R, Nanda R (2012) A darker side to decentralized banks: market power and credit rationing in SME lending. J Financ Econ 105:353–366CrossRefGoogle Scholar
  24. Cetorelli N, Strahan PE (2006) Finance as a barrier to entry: bank competition and industry structure in local U.S. markets. J Financ 61:437–461CrossRefGoogle Scholar
  25. Chiaramonte L, Casu B (2017) Capital and liquidity ratios and financial distress. Evidence from the European banking industry. Br Account Rev 49:138–161CrossRefGoogle Scholar
  26. Cook RD (1977) Detection of influential observations in linear regression. Technometrics 19:15–18Google Scholar
  27. Cook RD (1979) Influential observations in linear regression. J Am Stat Assoc 74:169–174CrossRefGoogle Scholar
  28. Coval JD, Thakor AV (2005) Financial intermediation as a beliefs-bridge between optimists and pessimists. J Financ Econ 75:535–569CrossRefGoogle Scholar
  29. Delis MD, Staikouras PK (2011) Supervisory effectiveness and bank risk. Rev Financ 15:511–543CrossRefGoogle Scholar
  30. Diamond DW (1984) Financial intermediation and delegated monitoring. Rev Econ Stud 51:393–414CrossRefGoogle Scholar
  31. Diamond DW, Dybvig PH (1983) Bank runs, deposit insurance, and liquidity. J Polit Econ 91:401–419CrossRefGoogle Scholar
  32. Diamond DW, Rajan RG (2000) A theory of bank capital. J Financ 55:2431–2465CrossRefGoogle Scholar
  33. Diamond DW, Rajan RG (2001) Liquidity risk, liquidity creation, and financial fragility: a theory of banking. J Polit Econ 109:287–327CrossRefGoogle Scholar
  34. Distinguin I, Roulet C, Tarazi A (2013) Bank regulatory capital and liquidity: evidence from US and European publicly traded banks. J Bank Financ 37:3295–3317CrossRefGoogle Scholar
  35. Flannery MJ, Rangan KP (2008) What caused the bank capital build-up of the 1990s? Rev Financ 12:391–429CrossRefGoogle Scholar
  36. Fu XM, Lin YR, Molyneux P (2016) Bank capital and liquidity creation in Asia Pacific. Econ Inq 54:966–993CrossRefGoogle Scholar
  37. Fungáčová Z, Weill L, Zhou M (2017) Bank capital, liquidity creation and deposit insurance. J Financ Serv Res 51:97–123CrossRefGoogle Scholar
  38. Gatev E, Strahan PE (2006) Banks’ advantage in hedging liquidity risk: theory and evidence from the commercial paper market. J Financ 61:867–892CrossRefGoogle Scholar
  39. Gatev E, Schuermann T, Strahan PE (2006) How do banks manage liquidity risk? Evidence from the equity and deposit markets in the fall of 1998. In: Carey M, Stulz R (eds) Risks of financial institutions. University of Chicago Press, Chicago, pp 105–127Google Scholar
  40. Gatev E, Schuermann T, Strahan PE (2009) Managing bank liquidity risk: how deposit-loan synergies vary with market conditions. Rev Financ Stud 22:995–1020CrossRefGoogle Scholar
  41. Gobat J, Yanase M, Maloney J (2014) The net stable funding ratio: impact and issues for consideration. International Monetary Fund, Working Paper (14/106)Google Scholar
  42. Gorton G, Winton A (2000) Liquidity provision, bank capital, and the macroeconomy. University of Minnesota, Working PaperGoogle Scholar
  43. Gropp R, Heider F (2010) The determinants of capital structure. Rev Financ 14:587–622CrossRefGoogle Scholar
  44. He Z, Xiong W (2012) Dynamic debt runs. Rev Financ Stud 25:1799–1843CrossRefGoogle Scholar
  45. Holmström B, Tirole J (1998) Private and public supply of liquidity. J Polit Econ 106:1–40CrossRefGoogle Scholar
  46. Horvath R, Seidler J, Weill L (2014) Bank capital and liquidity creation: granger-causality evidence. J Financ Res 45:341–361Google Scholar
  47. Horvath R, Seidler J, Weill L (2016) How bank competition influences liquidity creation. Econ Model 52:155–161CrossRefGoogle Scholar
  48. Hughes JP, Mester L, Moon C (2001) Are scale economies in banking elusive or illusive. Evidence obtained by incorporating capital structure and risk-taking into models of bank production. J Bank Financ 25:2169–2208CrossRefGoogle Scholar
  49. Imbierowicz B, Rauch C (2014) The relationship between liquidity risk and credit risk in banks. J Bank Financ 40:242–256CrossRefGoogle Scholar
  50. Jiang L, Levine R, Lin C (2016) Competition and bank liquidity creation. National Bureau of Economic Research, Working Paper (22195)Google Scholar
  51. Jokipii T, Milne A (2011) Bank capital buffer and risk adjustment decisions. J Financ Stab 7:165–178CrossRefGoogle Scholar
  52. Kashyap AK, Rajan RG, Stein JC (2002) Banks as liquidity providers: an explanation for the coexistence of lending and deposit-taking. J Financ 57:33–73CrossRefGoogle Scholar
  53. Köhler M (2015) Which banks are more risky? The impact of business model on bank stability. J Financ Stab 16:195–212CrossRefGoogle Scholar
  54. Laeven L, Majnoni G (2003) Loan loss provisioning and economic slowdowns: too much, too late? J Financ Intermed 12:178–197CrossRefGoogle Scholar
  55. Lindquist K (2004) Banks’ buffer capital: how important is risk. J Int Money Financ 23:493–513CrossRefGoogle Scholar
  56. Nier E, Baumann U (2006) Market discipline, disclosure and moral hazard in banking. J Financ Intermed 15:332–361CrossRefGoogle Scholar
  57. Peek J, Rosengren ES (1995) The capital crunch: neither a borrower nor a lender be. J Money Credit Bank 27:625–638CrossRefGoogle Scholar
  58. Pennacchi G (2006) Deposit insurance, bank regulation, and financial system risks. J Monet Econ 53:1–30CrossRefGoogle Scholar
  59. Petersen MA, Rajan RG (1995) The effect of credit market competition on lending relationships. Q J Econ 110:407–443CrossRefGoogle Scholar
  60. Repullo R (2004) Capital requirements, market power, and risk taking in banking. J Financ Intermed 13:156–182CrossRefGoogle Scholar
  61. Schaeck K, Cihák M (2012) Banking competition and capital ratios. Eur Financ Manag 18:836–866CrossRefGoogle Scholar
  62. Von Thadden EL (2004) Bank capital adequacy regulation under the new Basel accord. J Financ Intermed 13:90–95CrossRefGoogle Scholar
  63. Wagner W (2007) The liquidity of bank assets and bank liquidity. J Bank Financ 31:121–139CrossRefGoogle Scholar

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

Personalised recommendations