Bank capital and liquidity creation: new evidence from a quantile regression approach

Abstract

Purpose

The purpose of this paper is to examine the effect of bank capital on liquidity creation. Especially, the authors test two competing hypotheses: the “risk absorption” hypothesis and the “financial fragility-crowding out” hypothesis that describe such association in the context of UK and French banking industry.

Design/methodology/approach

The authors use data collected from Bankscope for commercial banks pertaining to the aforementioned countries. The sample period ranges from 2000 to 2014. Liquidity creation was measured using a novel approach proposed by Berger and Bouwman (2007). This study uses the quantile regression (QR) and the instrumental variables QR, along with classical ordinary least squares (OLS) and panel regression, to deal with the mixed results reported by previous papers.

Findings

Using OLS and panel regression, the authors first find that bank capital negatively affects liquidity creation which supports risk absorption hypothesis. Second, the result from QR confirms the negative association between the aforementioned variables and shows that the effect is homogenous across quantiles of liquidity creation distribution. The result remains unchanged when using the QR with instrumental variables to address the potential problem of endogeneity.

Originality/value

This paper sheds more lights on the relationship between bank capital and liquidity creation by using a novel estimation approach based on the QR methodology.

Citation

Mazioud Chaabouni, M., Zouaoui, H. and Ellouz, N.Z. (2018), "Bank capital and liquidity creation: new evidence from a quantile regression approach", Managerial Finance, Vol. 44 No. 12, pp. 1382-1400. https://doi.org/10.1108/MF-11-2017-0478