Competition and Bank Liquidity Creation. (14th September 2018)

• Record Type: Journal Article
• Authors: Jiang, Liangliang; Levine, Ross; Lin, Chen
• Is Part Of: Journal of financial and quantitative analysis. Volume 54:Number 2(2019)
• Page Start: 513
• Page End: 538
• Publication Date: 2018-09-14
• Subjects: Finance -- Periodicals; Investments -- Mathematics -- Periodicals; 332.05
• DOI: 10.1017/S0022109018000820
• Languages: English
• ISSNs: 0022-1090

Abstract

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).