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High Liquidity Creation and Bank Failures

By: Zuzana Fungacova,Rima Turk,Laurent Weill

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High Liquidity Creation and Bank Failures

By: Zuzana Fungacova,Rima Turk,Laurent Weill

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.

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Page Count

33

Publisher

International Monetary Fund

Published Date

ISBN 10

1484371100

ISBN 13

9781484371107

High Liquidity Creation and Bank Failures

By: Zuzana Fungacova,Rima Turk,Laurent Weill

Write a review Read reviews Take a Quiz Solve Book Puzzle

High Liquidity Creation and Bank Failures

By: Zuzana Fungacova,Rima Turk,Laurent Weill

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.

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Age

Page Count

33

Publisher

International Monetary Fund

Published Date

ISBN 10

1484371100

ISBN 13

9781484371107

High Liquidity Creation and Bank Failures

Do They Behave Differently?

By: Zuzana Fungacova,Rima Turk,Laurent Weill

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High Liquidity Creation and Bank Failures

Do They Behave Differently?

By: Zuzana Fungacova,Rima Turk,Laurent Weill

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.

Average ratings

N/A

5

0%

4

0%

3

0%

2

0%

1

0%

Solve jigsaw puzzle

Age

Page Count

33

Publisher

International Monetary Fund

Published Date

ISBN 10

1475581807

ISBN 13

9781475581805