Wholesale funding and liquidity creation

George Kladakis; Lei Chen; Sotirios K. Bellos

doi:10.1007/s11156-022-01081-9

Wholesale funding and liquidity creation

George Kladakis^*, Lei Chen, Sotirios K. Bellos

^*Corresponding author for this work

Finance (Business School)

Research output: Contribution to journal › Article › peer-review

Abstract

We examine the relationship between wholesale funding and liquidity creation using a sample of 825 banks in 84 countries during the post-crisis period of 2010–2020. We find that asset-side liquidity creation is consistently negatively associated with short-term wholesale funding, but not with long-term wholesale funding. Our results suggest that the relationship of short-term wholesale funding with asset-side liquidity creation is significantly driven by a negative relationship with illiquid lending. Moreover, our results show that the negative relationship between wholesale funding and liquidity creation is positively moderated by asset risk, suggesting the presence of moral hazard incentives. Our results are robust to a series of tests and have important implications for bank liquidity regulation.

Original language	English
Pages (from-to)	1501-1524
Number of pages	24
Journal	Review of Quantitative Finance and Accounting
Volume	59
Early online date	5 Jul 2022
DOIs	https://doi.org/10.1007/s11156-022-01081-9
Publication status	Published - 1 Nov 2022

Keywords

Wholesale funding
Liquidity creation
Bank liquidity
Lending
Moral hazard

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Kladakis_2022_RevQuantFinAcc_Wholesale-funding-liquidity-creation_CC
Copyright © The Author(s) 2022. Open Access: This article is licensed under a Creative Commons Attribution 4.0 International License (https://creativecommons.org/licenses/by/4.0/.), which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made.
Final published version, 1.42 MBLicence: CC BY

Cite this

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title = "Wholesale funding and liquidity creation",

abstract = "We examine the relationship between wholesale funding and liquidity creation using a sample of 825 banks in 84 countries during the post-crisis period of 2010–2020. We find that asset-side liquidity creation is consistently negatively associated with short-term wholesale funding, but not with long-term wholesale funding. Our results suggest that the relationship of short-term wholesale funding with asset-side liquidity creation is significantly driven by a negative relationship with illiquid lending. Moreover, our results show that the negative relationship between wholesale funding and liquidity creation is positively moderated by asset risk, suggesting the presence of moral hazard incentives. Our results are robust to a series of tests and have important implications for bank liquidity regulation.",

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AU - Kladakis, George

AU - Chen, Lei

AU - Bellos, Sotirios K.

PY - 2022/11/1

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N2 - We examine the relationship between wholesale funding and liquidity creation using a sample of 825 banks in 84 countries during the post-crisis period of 2010–2020. We find that asset-side liquidity creation is consistently negatively associated with short-term wholesale funding, but not with long-term wholesale funding. Our results suggest that the relationship of short-term wholesale funding with asset-side liquidity creation is significantly driven by a negative relationship with illiquid lending. Moreover, our results show that the negative relationship between wholesale funding and liquidity creation is positively moderated by asset risk, suggesting the presence of moral hazard incentives. Our results are robust to a series of tests and have important implications for bank liquidity regulation.

AB - We examine the relationship between wholesale funding and liquidity creation using a sample of 825 banks in 84 countries during the post-crisis period of 2010–2020. We find that asset-side liquidity creation is consistently negatively associated with short-term wholesale funding, but not with long-term wholesale funding. Our results suggest that the relationship of short-term wholesale funding with asset-side liquidity creation is significantly driven by a negative relationship with illiquid lending. Moreover, our results show that the negative relationship between wholesale funding and liquidity creation is positively moderated by asset risk, suggesting the presence of moral hazard incentives. Our results are robust to a series of tests and have important implications for bank liquidity regulation.

KW - Wholesale funding

KW - Liquidity creation

KW - Bank liquidity

KW - Lending

KW - Moral hazard

U2 - 10.1007/s11156-022-01081-9

DO - 10.1007/s11156-022-01081-9

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VL - 59

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EP - 1524

JO - Review of Quantitative Finance and Accounting

JF - Review of Quantitative Finance and Accounting

ER -

Wholesale funding and liquidity creation

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Keywords

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