Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153930
Authors: 
Horváth, Roman
Seidler, Jakub
Weill, Laurent
Year of Publication: 
2012
Series/Report no.: 
ECB Working Paper 1497
Abstract: 
We examine the relation between capital and liquidity creation. This issue is interesting because of the potential impact on liquidity creation from tighter capital requirements such as those in Basel III. We perform Granger-causality tests in a dynamic GMM panel estimator framework on an exhaustive data set of Czech banks, which mainly includes small banks from 2000 to 2010. We observe a strong expansion in liquidity creation until the financial crisis that was mainly driven by large banks. We show that capital negatively Granger-causes liquidity creation in this industry, where majority of banks are small. But we also observe that liquidity creation Granger-causes a reduction in capital. These findings support the view that Basel III can reduce liquidity creation, but also that greater liquidity creation can reduce banks’ solvency. Thus, we show that this reverse causality generates a trade-off between the benefits of financial stability induced by stronger capital requirements and the benefits of increased liquidity creation.
Subjects: 
bank capital
Basel III
Liquidity creation
JEL: 
G21
G28
Document Type: 
Working Paper

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