RFS Advance Access originally published online on January 8, 2009
Review of Financial Studies 2009 22(9):3779-3837; doi:10.1093/rfs/hhn104
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Bank Liquidity Creation
University of South Carolina, Wharton Financial Institutions Center, CentER, Tilburg University
Case Western Reserve University, Wharton Financial Institutions Center
Send correspondence to Christa H. S. Bouwman, Case Western Reserve University, Wharton Financial Institutions Center, 10900 Euclid Avenue, 362 Peter B. Lewis Building, Cleveland, OH 44106; telephone: (216) 368-3688; fax: (216) 368-6249; E-mail: christa.bouwman{at}case.edu.
JEL Classification: G32, G28, G21
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Abstract |
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Although the modern theory of financial intermediation portrays liquidity creation as an essential role of banks, comprehensive measures of bank liquidity creation do not exist. We construct four measures and apply them to data on virtually all U.S. banks from 1993 to 2003. We find that bank liquidity creation increased every year and exceeded $2.8 trillion in 2003. Large banks, multibank holding company members, retail banks, and recently merged banks created the most liquidity. Bank liquidity creation is positively correlated with bank value. Testing recent theories of the relationship between capital and liquidity creation, we find that the relationship is positive for large banks and negative for small banks.
A previous version of this article was entitled "Bank Capital and Liquidity Creation." Our bank liquidity creation data is available for research purposes at: http://wsomfaculty.case.edu/bouwman/data.html. The authors thank two anonymous referees and Paolo Fulghieri, the editor, for helpful suggestions; Bob Avery, Bill Bassett, Sreedhar Bharath, Arnoud Boot, Bob DeYoung, Doug Diamond, Phil Dybvig, Mark Flannery, Michael Gordy, Diana Hancock, Gautam Kaul, Lutz Kilian, Beth Kiser, Vikram Nanda, Charlotte Ostergaard, George Pennacchi, Jianping Qi, Rich Rosen, Doug Skinner, Anjan Thakor, Bent Vale, Egon Zakrajsek, and participants at presentations at the Western Finance Association Meeting, the Financial Intermediation Research Society Meeting, the European Finance Association, the Federal Reserve Bank of Chicago's Bank Structure and Competition Conference, the FDIC/JFSR Conference on Liquidity and Liquidity Risk, the University of Michigan, Case Western Reserve University, Ohio State University, ESCP-EAP European School of Management, Stockholm School of Economics, Yale School of Management, Binghamton University, the Federal Reserve Board, the Federal Reserve Bank of Cleveland, the Federal Reserve Bank of Chicago, the Norges Bank, and Sveriges Riksbank for useful comments; Ron Borzekowski for providing data; and Phil Ostromogolsky for excellent research assistance.