Cyclicality of liquidity creation: Nonlinear evidence from US bank holding companies

Abstract Using a panel smooth transition regression framework on new proxy of the business cycle (BC) index and quarterly data US bank holding companies from 1993Q1 to 2020Q1, our results provide empirical support for theory that BC has nonlinear effect liquidity creation. We find positive highly significant creation, which not only supports pro‐cyclicality creation but also improves estimation compared previous studies. The are robust different proxies model specifications. document create more during expansion phase (normal times) than recession (crisis BC, suggesting an asymmetrical changes Our findings have important implications financial market participants by banks should keep alternative sources funding hand phase. Insights study policy central prudent supervisors consider when incentivizing banks, instance, lowering regulatory requirements, adjusting rate, or implementing any other quantitative easing system efficient.