Chapter 4 - Measurement of Bank Liquidity Creation

Abstract

This chapter introduces the “cat fat” measure of bank liquidity creation that is used in the empirical analyses in this book. This measure classifies virtually all bank activities as liquid, semiliquid, or illiquid using information on product category and maturity combined, but classifies loans purely by category (“cat”) due to data limitations, and includes off-balance sheet activities (“fat”). It also compares this measure to several alternative measures of liquidity creation that classify loans purely by maturity (“mat”), exclude off-balance sheet activities (“nonfat”), take into account takedown probabilities of off-balance sheet guarantees, and take into account securitization frequencies. It discusses why the “cat fat” measure is preferred to these alternative measures. The key takeaways are the method for calculating “cat fat” liquidity creation and the understanding that the “cat fat” measure is preferred because it is most consistent with the liquidity creation theories.