A Panorama of Liquidity Creation in Turkish Banking Industry: Highlights, Predictors and Consequences

This paper follows a holistic approach to analyze the concept of liquidity creation in the case of the Turkish banking industry. In the first part of our analysis, we implement a revised version of the novel method suggested by Berger and Bouwman (2009) to construct liquidity creation proxies with varying scope and content for a sample of 24 banks over the period 2003-2023. The second part of the paper attempts to test frequently cited hypotheses from the banking literature on an emerging market case. Our estimations show that capital adequacy, ownership structure and the level of competition stand out as paramount predictors of bank liquidity creation. Specifically, banks with stronger capitalization experience a lower level of liquidity creation, whereas state-owned banks tend to create more liquidity relative to non-state-owned peers. It is also found that improving competition among banks might boost the liquidity creation process. Moreover, our findings are informative concerning the potential implications of liquidity creation. We find that increasing liquidity creation co-exists with higher individual bank risk. In the last stage, we adopt a regional analysis to assess the effect of liquidity creation on economic growth. By using the branch network of sample banks as the instrument, we transform the bank-level data into a spatial representation of liquidity creation for 81 provinces of Türkiye. Our estimations imply that liquidity creation is positively related to provincial economic growth.