Abstract

This paper aims to evaluate the relationship between capital and liquidity following the implementation of the Basel III rules. These regulatory measures target both increased capital ratios and a reduction of banks’ maturity transformation risk , which could result in excessive constraints on bank liquidity creation, thereby negatively affecting economic growth. Using a simultaneous equation model, we find a bi-causal negative relationship, which suggests that banks may reduce liquidity creation as capital increases; and when liquidity creation increases, banks reduce capital ratios. Our results therefore imply a trade-off between financial stability (higher capital, reduced risk) and economic growth (liquidity creation).

Publication Type:	Article
Additional Information:	This is a post-peer-review, pre-copyedit version of an article published in Journal of Financial Services Research. The final authenticated version is available online at: https://doi.org/10.1007/s10693-018-0304-y.
Publisher Keywords:	bank capital; liquidity creation; illiquidity; net stable funding ratio; Basel III; Eurozone banking system
Subjects:	D History General and Old World > DA Great Britain > DAW Central Europe H Social Sciences > HB Economic Theory H Social Sciences > HG Finance
Departments:	Bayes Business School > Finance

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