Empirical Studies on Bank Liquidity Creation: Implications for Regulation, Credit Ratings and Ethics

This thesis investigates the influential factors of bank liquidity creation. Creating liquidity for depositors and borrowers is one of banks’ main functions in the economy that promotes economic growth but also increases risk in the banking sector since illiquid loans are funded with liquid deposits. The thesis spans across three empirical chapters with novel findings that can assist both regulators and bank managers. First, banks are found to create more liquidity in countries with greater official supervisory power and more actions taken to curtail moral hazard, while they create less liquidity in countries with tighter capital regulations, more activity restrictions and stronger private monitoring. Second, purchasing multiple credit ratings is negatively associated with bank liquidity creation. Regulators increasingly rely on credit rating agencies for the assessment of banks’ creditworthiness, but it appears that this is not beneficial for liquidity creation. A supplementary study also shows that the deterioration of bank asset quality increases the probability of wider rating disagreements. Finally, ethical bank disclosures and liquidity creation are found to be positively associated, indicating that banks strategically use their disclosures to earn their customers’ trust. These empirical results are robust to numerous tests that address concerns such as endogeneity, among others.