The moderating role of capital on the relationship between bank liquidity creation and failure risk

Chen Zheng, Adrian Cheung, Tom Cronje

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

We examine the role of bank capital in moderating the relationship between bank liquidity creation and the failure risk in U.S. banks over the period of 2003-2014. We find that, conditional on bank capital, bank liquidity creation is related to bank failure risk negatively. The negative relationship is moderated positively (i.e., strengthened) by (changes in) bank capital. This finding is consistent with the view that banks may strengthen their solvency through increased capital in response to the illiquidity risk associated with liquidity creation; and higher capital enhances the ability of banks to create liquidity. The result is robust to
different estimation methods, and alternative measures of liquidity creation, bank failure risk, and bank capital. Further analysis shows that the significant and negative effect is more prominent for small banks, and the impact of bank capital was more pronounced during the recent financial crisis of 2007-2009.
Original languageEnglish
Article number105651
Number of pages22
JournalJOURNAL OF BANKING & FINANCE
Volume108
DOIs
Publication statusPublished - Nov 2019

Keywords

  • Liquidity creation
  • Bank failure
  • Bank capital
  • Bank size
  • Crisis
  • Liquidity risk

Fingerprint Dive into the research topics of 'The moderating role of capital on the relationship between bank liquidity creation and failure risk'. Together they form a unique fingerprint.

  • Cite this