Liquidity creation cyclicality, capital regulation and interbank credit: Evidence from Chinese commercial banks

Abstract

The cyclicality of the banking industry is closely related to financial crisis. Based on the methodology of Berger and Bouwman (2009) to measure bank liquidity creation, this paper investigates whether liquidity creation is cyclical for Chinese banks during 2012–2018. Our results indicate that liquidity creation by Chinese banks is procyclical and this procyclicality is more pronounced among regional banks. And we further explore the influence of capital regulatory pressure and interbank credit on the procyclicality of Chinese bank liquidity creation. We find that capital regulatory pressure and interbank credit are helpful in mitigating the procyclicality of bank liquidity creation, especially among regional banks. As the Chinese banking industry takes a great proportion of the global banking industry, our findings provide various implications on capital regulation and interbank business supervision for national and international bank regulators and policymakers.