Bank liquidity creation can influence the fragility of the financial system

banking
Credit: CC0 Public Domain

How does bank liquidity creation affect the overall fragility of the banking sector and the systemic risk posed by individual financial institutions? Does bank liquidity creation influence technological innovation? And what are the real consequences of bank supervision to financial regulators?

According to Sara Yasar's to be examined at the University of Vaasa on December 8, 2021, bank liquidity creation decreases at the individual bank level in the U.S. Nevertheless, the results also indicate that liquidity creation can strengthen the systemic linkage of individual banks to severe shocks in the financial system.

In addition, Yasar shows that liquidity creation by the U.S. banks can stymie firms' as measured by patent quantity and quality, meaning that bank liquidity creation, on average, has a negative impact on innovation. However, this finding depends on the firm's industry and the amount of tangible assets.

When examining how different supervisory practices affect bank liquidity creation in 27 European countries, she finds that the traditional approach to bank supervision that entails strengthening official supervisory authorities tends to decrease bank liquidity creation. Moreover, a supervisory strategy that strengthens private sector monitoring of banks lowers bank liquidity risk.

"Putting all banks under common regulatory and supervisory practices is difficult, as banks operating in certain environments may be exposed to higher risks," says Sara Yasar who is currently working at the European Central Bank.


Explore further

Lessons today's banks should take from Great Depression Chicago

More information: Thesis: osuva.uwasa.fi/handle/10024/13158
Citation: Bank liquidity creation can influence the fragility of the financial system (2021, November 30) retrieved 29 January 2022 from https://phys.org/news/2021-11-bank-liquidity-creation-fragility-financial.html
This document is subject to copyright. Apart from any fair dealing for the purpose of private study or research, no part may be reproduced without the written permission. The content is provided for information purposes only.
6 shares

Feedback to editors