Title

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.

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

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Jun 24th, 3:00 PM Jun 24th, 3:20 PM

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.