IDEAS home Printed from https://ideas.repec.org/p/ecl/upafin/11-21.html
   My bibliography  Save this paper

Bank Liquidity Creation, Monetary Policy, and Financial Crises

Author

Listed:
  • Berger, Allen N.

    (University of SC and Wharton Financial Institutions Center, University of PA)

  • Bouwman, Christa H. S.

    (Case Western Reserve University and Wharton Financial Institutions Center, University of PA)

Abstract

Monetary policy efficacy depends largely on how it affects bank behavior. Recent events have cast doubt on how well monetary policy works in this regard, particularly during financial crises. In addition, issues have been raised about the role of banks in creating asset bubbles that burst and lead to crises. In this paper, we address these issues by focusing on bank liquidity creation, which is a comprehensive measure of bank output that accounts for all on- and off-balance sheet activities. Specifically, we formulate and test hypotheses that address the following questions: (1) How does monetary policy affect bank liquidity creation during normal times? (2) Does monetary policy affect bank liquidity creation differently during financial crises versus normal times? (3) Is high aggregate bank liquidity creation an indicator of an impending financial crisis? We have three main findings. First, during normal times, monetary policy affects liquidity creation, but only for small banks. Second, the effects of monetary policy are weaker for banks of all sizes during financial crises than during normal times. Third, liquidity creation tends to be high (relative to trend) prior to financial crises and has incremental explanatory power in predicting crises even after controlling for other macroeconomic factors.

Suggested Citation

  • Berger, Allen N. & Bouwman, Christa H. S., 2011. "Bank Liquidity Creation, Monetary Policy, and Financial Crises," Working Papers 11-21, University of Pennsylvania, Wharton School, Weiss Center.
    • Handle: RePEc:ecl:upafin:11-21
    as

    Download full text from publisher

    File URL: http://fic.wharton.upenn.edu/fic/papers/11/11-21.pdf
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Franch, Fabio & Nocciola, Luca & Vouldis, Angelos, 2024. "Temporal networks and financial contagion," Journal of Financial Stability, Elsevier, vol. 71(C).
    2. Zuzana Fungacova & Ms. Rima A Turk & Laurent Weill, 2015. "High Liquidity Creation and Bank Failures: Do They Behave Differently?," IMF Working Papers 2015/103, International Monetary Fund.
    3. Roman Horváth & Jakub Seidler & Laurent Weill, 2014. "Bank Capital and Liquidity Creation: Granger-Causality Evidence," Journal of Financial Services Research, Springer;Western Finance Association, vol. 45(3), pages 341-361, June.
    4. Horvath, Roman & Seidler, Jakub & Weill, Laurent, 2016. "How bank competition influences liquidity creation," Economic Modelling, Elsevier, vol. 52(PA), pages 155-161.
    5. Fungáčová, Zuzana & Turk-Ariss, Rima & Weill, Laurent, 2013. "Does excessive liquidity creation trigger bank failures?," BOFIT Discussion Papers 2/2013, Bank of Finland, Institute for Economies in Transition.
    6. repec:zbw:bofitp:2013_002 is not listed on IDEAS
    7. Peter Spahn, 2014. "The Bank Lending Channel in a Simple Macro Model - How to Extend the Taylor Rule?," ROME Working Papers 201409, ROME Network.
    8. Bhatta, Dhiraj, 2022. "Sustainable Growth Decisions and Strategies of the US Agricultural and Non-Agricultural Banks during the COVID Pandemic Period," 2022 Annual Meeting, July 31-August 2, Anaheim, California 322325, Agricultural and Applied Economics Association.
    9. repec:zbw:bofitp:2013_016 is not listed on IDEAS

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecl:upafin:11-21. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/wcupaus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.