High Liquidity Creation and Bank Failures: Do They Behave Differently?
IMF Working Papers, May 6, 2015
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Bibliographic details
- Authors: Zuzana Fungacova, Rima A Turk, Laurent Weill
- Published: May 6, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475581805.001
Summary and central hypothesis
- Formulates the “High Liquidity Creation Hypothesis” (HLCH): a proliferation in the core activity of bank liquidity creation increases failure probability.
- Tests HLCH in the context of Russian banking, described as a natural field experiment due to numerous failures experienced over the past decade.
- Uses Berger and Bouwman’s (2009) liquidity creation measures as a comprehensive proxy for overall bank output.
- Main empirical finding: high liquidity creation significantly increases the probability of bank failure; this finding survives multiple robustness checks.
- Policy implication summarized: 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.
Methodology and scope
- Empirical setting: Russian banking sector (numerous failures over the past decade).
- Liquidity measurement: Berger and Bouwman’s (2009) liquidity creation measures used as proxy for bank output.
- Robustness: Results reported to survive multiple robustness checks (details contained in the Working Paper).
Key findings and implications
- High liquidity creation is positively associated with the probability of bank failure.
- Regulatory suggestion: early identification of high liquidity creators and enhanced monitoring of their funding and investment activities can mitigate systemic distress and reduce social costs of bank failures.
Subjects and keywords (as listed)
- Subjects: 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.