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Liquidity Creation and Trust Environment

Author

Listed:
  • Jérémie Bertrand

    (LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique)

  • Paul-Olivier Klein

    (UJML - Université Jean Moulin - Lyon 3 - Université de Lyon)

  • Jean-Loup Soula

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

Abstract

Trust towards banks plays a central role in theoretical literature. Diamond and Dybvig (J Polit Econ 91:401–419, 1983) argue that in a trustworthy environment banks can easily collect deposit foster banking activity and asset transformation. Diamond and Rajan (J Polit Econ 109:287–327, 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 (Rev Financ Stud 22:3779–3837, 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 & Paul-Olivier Klein & Jean-Loup Soula, 2021. "Liquidity Creation and Trust Environment," Post-Print hal-03976673, HAL.
    • Handle: RePEc:hal:journl:hal-03976673
    DOI: 10.1007/s10693-021-00353-0
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    Cited by:

    1. Kladakis, George & Chen, Lei & Bellos, Sotirios K., 2023. "Ethical bank disclosures and liquidity creation," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 84(C).

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