Funding cost and bank liquidity creation: evidence from US
Abstract/Description
Recent academic research shows that banks with high amount of deposits are inclined towards creating more liquidity and take more risk. However, little is known about the puzzle of liquidity creation and how it is influenced by cost of funding. This paper aims to study the impact of the cost of funding on liquidity creation in the US banking industry. Using comprehensive quarterly data for the period of 2000 to 2017, we find that the cost of funding negatively relates to the bank ability to create liquidity and bank create less liquidity and take less risk when the cost of funding is high. Moreover, we show that large and public banks are more responsive to depositor's behavior, arising from changes in the cost of deposits. Our results are robust to alternative econometric approach, the measure of funding cost and liquidity creation, bank size and ownership structure and lastly to different crisis period.
Keywords
Track
Accounting, Law, and Finance
Session Number/Theme
Session 3A
Session Chair
Dr. Riffat Mughal, Shaheed Zulfikar Ali Bhutto Institute of Science & Technology (SZABIST)
Session Discussant
Dr. Hilal Anwar Butt; Dr. Mohsin Sadaqat
Start Date/Time
24-6-2022 3:00 PM
End Date/Time
24-6-2022 3:20 PM
Location
Crystal Ball Room, Marriott Hotel, Karachi
Recommended Citation
Khan, A., Tran, D., & Hassan, M. (2022). Funding cost and bank liquidity creation: evidence from US. 3rd IBA SBS International Conference 2024. Retrieved from https://ir.iba.edu.pk/sbsic/2022/program/39
COinS
Funding cost and bank liquidity creation: evidence from US
Crystal Ball Room, Marriott Hotel, Karachi
Recent academic research shows that banks with high amount of deposits are inclined towards creating more liquidity and take more risk. However, little is known about the puzzle of liquidity creation and how it is influenced by cost of funding. This paper aims to study the impact of the cost of funding on liquidity creation in the US banking industry. Using comprehensive quarterly data for the period of 2000 to 2017, we find that the cost of funding negatively relates to the bank ability to create liquidity and bank create less liquidity and take less risk when the cost of funding is high. Moreover, we show that large and public banks are more responsive to depositor's behavior, arising from changes in the cost of deposits. Our results are robust to alternative econometric approach, the measure of funding cost and liquidity creation, bank size and ownership structure and lastly to different crisis period.
