#07-02
The Measurement of Bank Liquidity Creation and the Effect of Capital
Allen N. Berger and Christa H.S. Bouwman, September 2006
Abstract: Although the modern theory of financial intermediation portrays banks as liquidity creators, comprehensive measures of bank liquidity creation do not exist. We construct such measures and apply them to data on U.S. banks from 1993-2003. Based on our preferred measure, the amount of liquidity created by the banking sector has grown by approximately two-thirds over this period, exceeding $1.5 trillion in 2003. We also analyze the effect of bank capital on liquidity creation, since existing theories produce opposing predictions. We find that capital has a positive effect on liquidity creation for large banks and a negative effect for small banks.
Keywords: Capital Structure, Liquidity Creation, Regulation, and Banking..
JEL classifications :G32, G28, and G21.
