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Competition and Bank Liquidity Creation

Published online by Cambridge University Press:  14 September 2018

Liangliang Jiang ,
Ross Levine  and
Chen Lin
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Abstract

We use a new identification strategy to assess whether an intensification of competition among banks increases or decreases the provision of a key banking service: liquidity creation. Although theory offers conflicting predictions about the impact of competition on liquidity creation, we find that regulatory-induced competition reduces liquidity creation. Consistent with a subset of models emphasizing that banks pushed toward insolvency reduce risk-taking activities, we discover that regulatory-induced competition reduces liquidity creation more among banks with less risk-absorbing capacity (e.g., less profitable banks).

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 2 , April 2019 , pp. 513 - 538
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We thank Jennifer Conrad (the editor) and an anonymous referee for guidance on how to improve the paper. We are grateful to Yona Rubinstein, David Sraer, and John Van Reenen for helpful suggestions on this research. We also thank seminar participants at Hong Kong Polytechnic University, London School of Economics, University of California, Berkeley, and University of Melbourne. Lin acknowledges financial support from the National Natural Science Foundation of China (No. 71790601).

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