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Liquidity Creation and Trust Environment

Author

Listed:
  • Jérémie Bertrand

    (IÉSEG School Of Management [Puteaux])

  • Jean-Loup Soula

    (EM Strasbourg - École de Management de Strasbourg = EM Strasbourg Business School)

  • Paul-Olivier Klein

    (Laboratoire de Recherche Magellan - UJML - Université Jean Moulin - Lyon 3 - Université de Lyon - Institut d'Administration des Entreprises (IAE) - Lyon)

Abstract

Trust towards banks plays a central role in theoretical literature. Diamond and Dybvig (1983) argue that in a trustworthy environment banks can easily collect deposit foster banking activity and asset transformation. Diamond and Rajan (2001) posit that a high trust environment discourages banks from creating liquidity. To address these conflicting views, the current study measures liquidity creation using Berger and Bouwman's (2009) methodology, then assesses the level of trust in the environment with four proxies and two additional instruments deployed in previous research. The results confirm a positive effect of trust in banks on liquidity creation, especially for small or state-chartered banks and during economic downturns. The results are robust to time effects and potential endogeneity concerns.

Suggested Citation

  • Jérémie Bertrand & Jean-Loup Soula & Paul-Olivier Klein, 2022. "Liquidity Creation and Trust Environment," Post-Print hal-03955028, HAL.
    • Handle: RePEc:hal:journl:hal-03955028
    DOI: 10.1007/s10693-021-00353-0
    Note: View the original document on HAL open archive server: https://univ-lyon3.hal.science/hal-03955028
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    References listed on IDEAS

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    Keywords

    Banking; Liquidity Creation; Trust; Financial Intermediation;
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