BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 16/2013:
How bank competition influence liquidity creation
Roman Horvath ()
, Jakub Seidler ()
and Laurent Weill ()
Abstract: This paper evaluates the effect of bank competition on
liquidity creation by banks. Thus, we contribute to the literature on both
bank competition and the determinants of liquidity creation by banks. To
explore this relationship, we conduct dynamic GMM panel estimations on a
dataset of Czech banks from 2002 to 2010. We find that enhanced competition
reduces liquidity creation, a finding we observe under different
specifications, including alternative measures of liquidity creation. We
explain this finding in terms of the impact of increased bank competition
on the financial fragility of banks, which leads banks to reduce their
lending and deposit activities. The evidence suggests that pro-competitive
policies in the banking industry can reduce liquidity provision by
banks.
Keywords: bank competition; liquidity creation; (follow links to similar papers)
JEL-Codes: G21; (follow links to similar papers)
23 pages, June 19, 2013
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