Bank Liquidity Creation and Financial Crises - 1st Edition - ISBN: 9780128002339, 9780128005316

Bank Liquidity Creation and Financial Crises

1st Edition

Authors: Allen Berger Christa Bouwman
Hardcover ISBN: 9780128002339
eBook ISBN: 9780128005316
Imprint: Academic Press
Published Date: 1st November 2015
Page Count: 294
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Bank Liquidity Creation and Financial Crises delivers a consistent, logical presentation of bank liquidity creation and addresses questions of research and policy interest that can be easily understood by readers with no advanced or specialized industry knowledge.

Authors Allen Berger and Christa Bouwman examine ways to measure bank liquidity creation, how much liquidity banks create in different countries, the effects of monetary policy (including interest rate policy, lender of last resort, and quantitative easing), the effects of capital, the effects of regulatory interventions, the effects of bailouts, and much more. They also analyze bank liquidity creation in the US over the past three decades during both normal times and financial crises.

Narrowing the gap between the "academic world" (focused on theories) and the "practitioner world" (dedicated to solving real-world problems), this book is a helpful new tool for evaluating a bank’s performance over time and comparing it to its peer group.

Key Features

  • Explains that bank liquidity creation is a more comprehensive measure of a bank’s output than traditional measures and can also be used to measure bank liquidity
  • Describes how high levels of bank liquidity creation may cause or predict future financial crises
  • Addresses questions of research and policy interest related to bank liquidity creation around the world and provides links to websites with data and other materials to address these questions
  • Includes such hot-button topics as the effects of monetary policy (including interest rate policy, lender of last resort, and quantitative easing), the effects of capital, the effects of regulatory interventions, and the effects of bailouts


Upper-division undergraduates, graduate students, and professionals worldwide working in banking, financial intermediation, and regulation, especially in respect to financial crises 

Table of Contents

  • Dedication
  • Preface
  • Acknowledgments
  • Part I: Introductory Materials
    • Chapter 1: Introduction
      • Abstract
      • 1.1. The focus of the book
      • 1.2. Liquidity creation theories
      • 1.3. Understanding financial statements
      • 1.4. Measurement of bank liquidity creation
      • 1.5. Using liquidity creation to measure bank output
      • 1.6. Using liquidity creation to measure bank liquidity
      • 1.7. Defining and dating financial crises
      • 1.8. How much liquidity do banks create during normal times and financial crises?
      • 1.9. The links between bank liquidity creation and future financial crises
      • 1.10. Do better capitalized banks create more or less liquidity?
      • 1.11. Which banks create the most and least liquidity?
      • 1.12. How do government policies and actions affect bank liquidity creation during normal times and financial crises?
      • 1.13. Bank liquidity creation: value, performance, and persistence
      • 1.14. How can bank executives, financial analysts, researchers (including academics and students), and policy makers (including legislators, regulators, and central bankers) use bank liquidity creation data to their advantages?
      • 1.15. Where we stand now and the open research and policy questions
      • 1.16. Links to websites containing data, documents, and other information useful for US bank performance benchmarking, research, and policy work
      • 1.17. Summary
    • Chapter 2: Liquidity Creation Theories
      • Abstract
      • 2.1. Liquidity creation on the balance sheet
      • 2.2. Liquidity creation off the balance sheet
      • 2.3. Liquidity created by other types of financial institutions and markets
      • 2.4. Summary
    • Chapter 3: Understanding Financial Statements
      • Abstract
      • 3.1. Financial statements of a large nonfinancial firm versus a large commercial bank
      • 3.2. Financial statements of a large commercial bank versus a small commercial bank
      • 3.3. Summary
  • Part II: Liquidity Creation Measurement and Uses
    • Chapter 4: Measurement of Bank Liquidity Creation
      • Abstract
      • 4.1. Preferred “cat fat” measure of liquidity creation
      • 4.2. Other main measures of liquidity creation
      • 4.3. Deep and Schaefer’s (2004) liquidity transformation measure
      • 4.4. Modification of the “cat fat” measure that takes into account takedown probabilities of off-balance sheet guarantees
      • 4.5. Modification of the “cat fat” measure that takes into account securitization frequencies
      • 4.6. Summary
    • Chapter 5: Using Liquidity Creation to Measure Bank Output
      • Abstract
      • 5.1. Traditional approaches to measuring bank output and what is missing
      • 5.2. Why “cat fat” bank liquidity creation is a superior measure of bank output
      • 5.3. Summary
    • Chapter 6: Using Liquidity Creation to Measure Bank Liquidity
      • Abstract
      • 6.1. Simple measures of bank liquidity
      • 6.2. Using normalized “cat fat” liquidity creation as a direct measure of bank illiquidity or an indirect measure of bank liquidity
      • 6.3. The Basel III measures of bank liquidity
      • 6.4. The Liquidity Mismatch Index (LMI) of bank liquidity
      • 6.5. Market measures of the liquidity of publicly traded equity and debt of listed banks and Bank Holding Companies (BHCs)
      • 6.6. Summary
  • Part III: Financial Crises, Liquidity Creation, and their Links
    • Chapter 7: Defining and Dating Financial Crises
      • Abstract
      • 7.1. Demirguc-Kunt and Detragiache’s (1998) analysis of worldwide banking crises from 1980 to 1994
      • 7.2. Reinhart and Rogoff’s (2009) analysis of worldwide financial crises over nearly eight centuries
      • 7.3. Laeven and Valencia’s (2013) analysis of worldwide financial crises from 1970 to 2011
      • 7.4. Von Hagen and Ho’s (2007) 1980–2007 worldwide banking crises
      • 7.5. Berger and Bouwman’s (2013) financial crises in the United States from 1984:Q1 to 2010:Q4
      • 7.6. Financial crises used in the empirical analyses in this book
      • 7.7. Summary
    • Chapter 8: How Much Liquidity Do Banks Create During Normal Times and Financial Crises?
      • Abstract
      • 8.1. Sample description and numbers of banks over time
      • 8.2. “Cat fat” liquidity creation and its components over time
      • 8.3. Alternative liquidity creation measures over time
      • 8.4. Alternative measures of output over time
      • 8.5. Summary
    • Chapter 9: The Links Between Bank Liquidity Creation and Future Financial Crises
      • Abstract
      • 9.1. Theoretical link between aggregate liquidity creation and future financial crises
      • 9.2. Empirical evidence on the link between aggregate bank liquidity creation and future financial crises
      • 9.3. New empirical evidence on the link between aggregate bank liquidity creation normalized by GDP and future financial crises
      • 9.4. Are financial crises always suboptimal?
      • 9.5. Summary
  • Part IV: Causes and Consequences of Liquidity Creation
    • Chapter 10: Do Better Capitalized Banks Create More or Less Liquidity?
      • Abstract
      • 10.1. Why do we care?
      • 10.2. What do the theories say?
      • 10.3. Empirical evidence on the relation between capital ratios and liquidity creation
      • 10.4. Summary
    • Chapter 11: Which Banks Create the Most and Least Liquidity?
      • Abstract
      • 11.1. Top and bottom liquidity-creating banks in each size class
      • 11.2. New evidence on the relations between bank liquidity creation and bank characteristics
      • 11.3. Summary
    • Chapter 12: How Do Government Policies and Actions Affect Bank Liquidity Creation During Normal Times and Financial Crises?
      • Abstract
      • 12.1. The effects of capital requirements on liquidity creation
      • 12.2. Stress tests in the United States and Europe
      • 12.3. Liquidity requirements
      • 12.4. Regulatory interventions, capital support or bailouts, and central bank funding
      • 12.5. Monetary policy
      • 12.6. Summary
    • Chapter 13: Bank Liquidity Creation: Value, Performance, and Persistence
      • Abstract
      • 13.1. Literature on bank liquidity creation and bank value
      • 13.2. New evidence on the relations between bank liquidity creation and bank performance
      • 13.3. Is there liquidity creation persistence?
      • 13.4. Summary
  • Part V: Looking Toward the Future
    • Chapter 14: How Can Bank Executives, Financial Analysts, Researchers (including Academics and Students), and Policy Makers (including Legislators, Regulators, and Central Bankers) Use Bank Liquidity Creation Data to Their Advantages?
      • Abstract
      • 14.1. Liquidity creation is a novel benchmarking tool that can be used by bank executives and financial analysts to evaluate a bank’s performance and compare it to its peer group
      • 14.2. Aggregate bank liquidity creation can be used by researchers and policy makers to predict financial crises
      • 14.3. Liquidity creation can be used by researchers and policy makers to assess risk taking and to predict failure of individual banks
      • 14.4. Use of liquidity creation in future research and policy work
      • 14.5. Summary
    • Chapter 15: Where We Stand Now and the Open Research and Policy Questions
      • Abstract
      • 15.1. Where do we stand now?
      • 15.2. Measuring bank liquidity creation and its causes and consequences around the world
      • 15.3. Effects of bank mergers and acquisitions on liquidity creation
      • 15.4. Effects of bank competition and market power on liquidity creation
      • 15.5. Effects of bank deregulation on liquidity creation
      • 15.6. Effects of deposit insurance on liquidity creation
      • 15.7. Effects of bank corporate governance – ownership, executive compensation, and board and management structure – on liquidity creation
      • 15.8. Liquidity creation and risk
      • 15.9. Effects of liquidity creation on real economic activity
      • 15.10. Is there an optimal scale of bank liquidity creation for the industry and for individual banks?
      • 15.11. Liquidity creation dynamics
      • 15.12. Liquidity creation by banks in different financial and legal systems
      • 15.13. Liquidity created by other types of financial institutions and markets, and how they interact with bank liquidity creation
      • 15.14. Summary
    • Chapter 16: Links to Websites Containing Data, Documents, and Other Information Useful for US Bank Performance Benchmarking, Research, and Policy Work
      • Abstract
      • 16.1. Liquidity creation data
      • 16.2. Commercial bank call report data
      • 16.3. Commercial bank reporting forms
      • 16.4. Bank holding company (BHC) data
      • 16.5. Bank holding company reporting forms
      • 16.6. Micro data reference manual (MDRM)
      • 16.7. Structure and geographical data
      • 16.8. FDIC’s summary of deposits (SoD) data
      • 16.9. Bank and BHC history (including mergers and acquisitions data)
      • 16.10. Bank failures data
      • 16.11. Federal Reserve’s senior loan officer survey (SLOS)
      • 16.12. Aggregate data on the banking sector
      • 16.13. St. Louis Federal Reserve’s FRED database
      • 16.14. Center for research in securities prices (CRSP) data for listed banks and listed BHCs
      • 16.15. EDGAR financial information on publicly-traded institutions
      • 16.16. Federal Reserve’s monetary policy tools
      • 16.17. Capital support provided through the troubled asset relief program (TARP)
      • 16.18. Home mortgage disclosure Act (HMDA) data
      • 16.19. Dealscan syndicated loan data
      • 16.20. Federal Reserve’s survey of small business finances (SSBF) data
      • 16.21. Kauffman firm survey (KFS) data
      • 16.22. Federal Reserve’s Survey of Consumer Finances (SCF) data
      • 16.23. Summary
  • References
  • Author Index
  • Subject Index


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About the Author

Allen Berger

Allen N. Berger is the H. Montague Osteen, Jr., Professor in Banking and Finance and Ph.D. coordinator of the Finance Department, Moore School of Business, and Carolina Distinguished Professor, University of South Carolina; Senior Fellow, Wharton Financial Institutions Center; Fellow, European Banking Center; and Secretary/Treasurer, Financial Intermediation Research Society. He also currently serves on the editorial boards of six professional finance journals. In addition, Professor Berger is past editor of the Journal of Money, Credit, and Banking and has co-edited six special issues of various professional journals and both editions of the Oxford Handbook of Banking. His research covers a variety of topics related to financial institutions. He is co-author of Bank Liquidity Creation and Financial Crises (Elsevier). He has published over 100 professional articles in refereed journals, including papers in top finance journals, Journal of Finance, Journal of Financial Economics, Review of Financial Studies, and Journal of Financial and Quantitative Analysis; top economics journals, Journal of Political Economy, American Economic Review, and Journal of Monetary Economics; and other top professional business journals, Managerial Science and Journal of Business; and over 30 other non-refereed publications. Professor Berger was Senior Economist from 1989 to 2008 and Economist from 1982-1989 at the Board of Governors of the Federal Reserve System. He received a Ph.D. in Economics from the University of California, Berkeley in 1983, and a B.A. in Economics from Northwestern University in 1976.

Affiliations and Expertise

Moore School of Business, University of South Carolina, Columbia, SC, USA

Christa Bouwman

Christa H.S. Bouwman is Associate Professor of Finance and RepublicBank Research Fellow at Mays Business School at Texas A&M University; Fellow of the Wharton Financial Institutions Center; and a Research Associate at the Federal Reserve Bank of Cleveland. She was Associate Professor of Banking & Finance at Case Western Reserve University, where she also held the Lewis-Progressive Chair; Visiting Assistant Professor of Finance at MIT’s Sloan School of Management; and Visiting Scholar at the Federal Reserve Bank of Boston. Professor Bouwman’s research interests are in Financial Intermediation and Corporate Finance. She is an Associate Editor at three journals. Her research papers have been published in the Journal of Financial Economics, Review of Financial Studies, Journal of Banking & Finance, MIT / Sloan Management Review, and Oxford Handbook of Banking. She is co-author of Bank Liquidity Creation and Financial Crises (Elsevier). Professor Bouwman worked for five years at ABN AMRO Bank and as a part-time litigative consultant for the U.S. Department of Justice. She has been nominated for numerous undergraduate and MBA Excellence in Teaching awards. She received a Ph.D. in Finance from the University of Michigan in 2005, an MBA from Cornell University in 1993, and a B.A./M.A. in Economics and Business (cum laude) from the University of Groningen – the Netherlands in 1993..

Affiliations and Expertise

Texas A&M University, College Station, TX, and Wharton Financial Institutions Center, Philadelphia, PA, USA


"A key economic function of banks is to create liquidity in the economy, financing illiquid assets with liquid labilities and enhancing overall funding of investment projects in the economy. Knowing how to measure how much liquidity is being created at any point in time is of central importance for economists, policymakers and bankers. This book, based on the path-breaking empirical measure for bank liquidity creation developed by the authors in their earlier published research,  provides an exhaustive and enlightening discussion of the variety of interesting issues related to bank liquidity creation, including its implications for bank stability and regulation. A must read!"  --Anjan Thakor, Washington University in St. Louis

"This text provides an excellent insight into the features of banks and the dynamics of financial intermediation. The authors provide terrific coverage of the liquidity creation process and how financial crises inhibit such activity. This is an essential guide for all students of banking and financial system behavior."  --Philip Molyneux, Bangor University