Bank Liquidity Creation

Current understanding of bank liquidity creation is reviewed in this chapter. Liquidity creation is a key function of banks, as they transform illiquid assets such as loans into liquid liabilities like deposits. Using Berger and Bouwman liquidity creation measures the extent of liquidity creation by US banks in recent years is assessed. The literature on the determinants of liquidity creation, including macroeconomic factors, banking sector characteristics, and bank-level factors like capital or corporate governance, is reviewed. The implications of liquidity creation, including the links to economic growth and financial stability, are also explored. The related concept of liquidity hoarding is touched upon. Overall, this chapter provides a comprehensive overview of theory and evidence on the central role of banks as liquidity creators.