Cyclicality of bank liquidity creation

Bank mergers, competition and liquidity

We provide a model of the impact of bank mergers on loan competition, individual reserve management and aggregate liquidity risk. Banks hold reserves against liquidity shocks, refinance in the interbank market and compete in a differentiated loan market. A merger creates an internal money market that induces financial cost advantages and may increase reserve holdings. We assess the liquidity ri...

Dynamic Shock Bank Liquidity Analysis

Liquidity Creation as Volatility Risk

We show, both theoretically and empirically, that liquidity creation induces negative exposure to volatility risk. Intuitively, liquidity creation involves taking positions that can be exploited by privately informed investors. These investors’ ability to predict future price changes makes their payoff resemble a straddle (a combination of a call and a put). By taking the other side, liquidity ...

Bank Liquidity and Bank Performance: Looking for a Nonlinear Nexus

Liquid assets are critical for banking operations. They guarantee avoiding liquidity risk and widens managerial decision options to invest in emerging profitable projects; however, holding extra liquidity entails opportunity costs. Accordingly, empirical literature does not provide a conclusive relationship between liquidity and profitability. The purpose of this research is to analyze the asym...

Tracing the Impact of Bank Liquidity Shocks

While bank lending may fall in response to shocks to their liquidity, to what extent are such shocks transmitted to borrowing …rms? Tracing such transmission mechanisms has proven di¢ cult in the past due to a lack of micro data linking banks to borrowing …rms and identi…cation concerns. This paper uses di¤erential liquidity shocks arising from unanticipated nuclear tests in Pakistan in 1998, a...