We formulate the “High Liquidity Creation Hypothesis” (HLCH) that a proliferation in the
core activity of bank liquidity creation increases failure probability. We test the HLCH in the
context of Russian banking, which provides a natural field experiment due to numerous
failures experienced over the past decade. Using Berger and Bouwman’s (2009) liquidity
creation measures as a comprehensive proxy for overall bank output, we find that high
liquidity creation significantly increases the probability of bank failure; this finding survives
multiple robustness checks. Our results suggest that regulatory authorities can mitigate
systemic distress and reduce the costs of bank failures to society through early identification
of high liquidity creators and enhanced monitoring of their funding and investment activities.
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|Size: ||1.1 MB|
|Publisher: ||INTERNATIONAL MONETARY FUND|
|Date published: || 2015|
|ISBN: ||9781484371107 (DRM-EPUB)|
|Read Aloud: ||not allowed|