Competition and Bank Liquidity Creation
Does an intensification of competition among banks increase or decrease liquidity creation? By integrating the dynamic process of interstate bank deregulation that lowered barriers to competition across U.S. states over the 1980s and 1990s with the gravity model of the geographic expansion of banks, we construct time-varying measures of the competitive pressures facing each individual bank. We find that regulatory-induced competition reduced liquidity creation. Consistent with some theories, we also find that the liquidity-destroying effects of competition are mitigated among more profitable banks and heightened among smaller banks.
We thank the seminar participants at University of Melbourne for many helpful comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Liangliang Jiang & Ross Levine & Chen Lin, 2019. "Competition and Bank Liquidity Creation," Journal of Financial and Quantitative Analysis, vol 54(2), pages 513-538. citation courtesy of