Over the past years, the subject of bank liquidity creation has become more and more the focus of research in financial intermediation. The widely accepted view today is that banks create liquidity on both the asset and liabilities side of their balance sheets by transforming maturities of balance sheet items. This process allows banks to hold illiquid monetary items for the non-bank public and give out liquid monetary items to both depositors and borrowers. The idea of bank liquidity is therefore an extension of the classic maturity transformation, as the bank creates liquidity on both sides of the balance sheet by offering access to long-term loans and contemporaneous access to short-term deposits.
Recent research focuses on measuring the amount of liquidity created in the banking sector (Deep and Schaefer (2004) and Berger and Bouwman (2008)); yet few studies shed light on the determinants of bank liquidity creation. The goal of this paper is therefore to give deeper empirical insight into bank balance sheet liquidity creation. We thereby aim at expanding the existing literature by trying to answer two previously unanswered questions. First: to what extent and by which means is liquidity created? And second: does monetary policy have an influence on bank liquidity creation?
Liquidity creation itself is seen as the primary source of economic welfare contribution by banks but also as their primary source of risk (see e.g. Bryant, 1980; Diamond and Dybvig, 1983 or Calomiris and Kahn, 1991). Our paper looks into the absolute and relative amounts of liquidity to provide an insight into the total liquidity amounts banks create for a given market as well as into the fragility of the balance sheets this liquidity creation triggers. We further shed light on the question of whether and if so, how - central banks can influence liquidity creation. Based on a large number of studies, central banks seem to have a solid understanding of the way a policy change influences bank lending and customers deposit behavior.
An unexplored, but nevertheless just as important aspect is the way a policy change influences the overall liquidity creation by banks. Knowledge about this interaction can be crucial, especially in times of crisis. Of additional interest is the institutional background of state- owned savings banks, on which we focus in our analysis. In Germany and many other countries, these banks are mandated to provide liquidity and general banking services for a given market. By being state-owned they exhibit a number of additional interesting features, such as safety and support frameworks or non-profit maximizing operative goals, which make them an ideal setting in which to examine the liquidity created by an individual bank and how it is affected by macroeconomic factors and central bank's policies.
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Savings Banks, Liquidity Creation and Monetary Policy
