European Business Schools Librarian's Group
HEC Research Papers Series,
HEC Paris
No 1582: The Bank Liquidity Creation and Equity Capital Puzzle
Allen N. Berger, Jiarui Guo, Xinming Li, Aluna Wang and Wenting Wang
Additional contact information
Allen N. Berger: University of South Carolina - Darla Moore School of Business
Jiarui Guo: University of International Business and Economics
Xinming Li: Nankai University
Aluna Wang: HEC Paris
Wenting Wang: University of South Carolina
Abstract: We revisit the bank capital-liquidity creation debate using quarterly US bank data for 20 years from 2003:Q1-2022:Q4, investigating for first time how relations differ for bank outputs versus inputs and for major outputs and inputs. We find a negative overall relation between capital and liquidity creation for small banks, consistent with the Financial Fragility-Crowding Out (FFCO) Hypothesis and a positive relation for large banks, consistent with the Risk Absorption (RA) Hypothesis. Key contributions are that we find much of the explanation of the size-class difference lies in the different effects for outputs versus inputs and for major outputs and inputs.
Keywords: bank liquidity creation; bank equity capital; banks
33 pages, August 7, 2025
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