Determinants of Bank Liquidity Creation

Abstract

This paper measures liquidity creation of German savings banks over the period of 1997-2006 and tries to detect possible influence factors thereof. Using two recently developed techniques to measure liquidity creation, the so called “BB-Measure” as developed by Berger and Bouwman in 2009 and the “Liquidity Transformation” (LT) Gap as developed by Deep and Schaefer in 2004, we are able to determine both absolute amounts of liquidity created for the economy as well as relative magnitudes of maturity transformation the observed banks perform to create liquidity. Using a multivariate dynamic panel regression framework we differentiate between two different sets of potential liquidity determinants: macroeconomic factors, such as monetary policy or economic strength indicators, as well as bank characteristic factors, such as size or business focus. We additionally account for most recent legal developments in the German banking sector by measuring the effects of the abolishment of state guarantees in the public banking sector on liquidity creation. Analyzing a proprietary dataset comprised of all 457 German savings banks containing detailed balance sheet as well as profit & loss account variables, we show that over the given period, the total amount of liquidity created by the savings banks increased by 51% (from 120.7 billion Euro in 1997 to 182.2 billion Euro in 2006). In terms of influence factors we find highly significant and robust values for economy and monetary policy indicators. It can be shown that liquidity creation seems to depend strongly negatively on monetary policy tightness: a monetary policy tightening induces a decrease in created liquidity. We do not find any bank specific factors, such as financial performance or size, to have any influence on liquidity creation.