High Liquidity Creation and Bank Failures: Do They Behave Differently?

By Zuzana Fungacova, Rima A Turk, Laurent Weill

May 6, 2015

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Format: Chicago

Zuzana Fungacova, Rima A Turk, and Laurent Weill. High Liquidity Creation and Bank Failures: Do They Behave Differently?, (USA: International Monetary Fund, 2015) accessed October 6, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We formulate the “High Liquidity Creation Hypothesis” (HLCH) that a proliferation in the core activity of bank liquidity creation increases failure probability. We test the HLCH in the context of Russian banking, which provides a natural field experiment due to numerous failures experienced over the past decade. Using Berger and Bouwman’s (2009) liquidity creation measures as a comprehensive proxy for overall bank output, we find that high liquidity creation significantly increases the probability of bank failure; this finding survives multiple robustness checks. Our results suggest that regulatory authorities can mitigate systemic distress and reduce the costs of bank failures to society through early identification of high liquidity creators and enhanced monitoring of their funding and investment activities.

Subject: Asset and liability management, Banking, Distressed institutions, Economic sectors, Financial institutions, Liquidity, Liquidity indicators, Liquidity management, Loans, Small and medium enterprises

Keywords: Bank failure literature, Bank Failures, Creation bank, Creation increase, Creation measure, Creation ratio, Distressed institutions, Global, Liquidity, Liquidity commitment, Liquidity creation, Liquidity creation activity, Liquidity creator, Liquidity demand, Liquidity management, Liquidity shock, Liquidity shortage, Loans, Return on assets, Small and medium enterprises, Small business, WP

Publication Details

Pages:

33
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/103
Stock No:

WPIEA2015103
ISBN:

9781475581805
ISSN:

1018-5941

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