Abstract
The paper analyzes the effects of bank funding structure and market power on the bank liquidity creation channel in an emerging market as well as the extent of monetary policy transmission. Using a panel of Vietnamese banks during 2007–2019, we find that banks may expand liquidity creation more aggressively after the central bank relaxes monetary policy through cutting policy interest rates or injecting money into the market. Further analysis reveals that not all banks are equally driven by monetary policy changes. First, greater market power weakens the monetary policy transmission via the bank liquidity creation channel. Second, banks with less reliance on customer deposits or having a more diversified funding pattern may be less sensitive to monetary policy shocks while creating liquidity. These findings hold across alternative liquidity creation measures (including and excluding off-balance sheet items) and various monetary policy indicators (based on both interest- and quantitative-based instruments).
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