Too Big to Care, Too Small to Matter: Macrofinancial Policy and Bank Liquidity Creation

Abstract

We estimate the volume of liquidity creation by U.S. bank holding companies between 1997 and 2015, and examine the impact of changes in macrofinancial policies on the dynamics of this process. We focus on three major policy developments occurring in the aftermath of the 2007-2009 financial crisis: bank capital regulation reform, monetary stimulus through quantitative easing, and the Troubled Asset Relief Program (TARP). The dynamics of bank liquidity creation differ considerably between small and large institutions. The level of bank capital requirements and the stance of monetary policy affect the liquidity creation of small and medium-sized banks, but not the largest institutions which control over 80% of the banking system’s assets. In contrast, TARP has only short-term effects on small and medium banks, and leads to a long-term decline in liquidity provision per dollar of assets of the largest banks.