We find that bank liquidity creation (LC) is statistically and economically significantly positively related to real economic output (GDP). This is robust to using instrumental variables and many robustness checks. LC also beats bank assets in “horse races.” On-balance sheet LC matters more...

Recent theory papers by Diamond and Rajan (2000, 2001) and others suggest that banks with higher capital ratios may create less liquidity because capital diminishes financial fragility and/or “crowds out” deposits. Other contributions suggest the opposite outcome: banks with higher capital...

Recent theory papers by Diamond and Rajan (2000, 2001) and others suggest that banks with higher capital ratios may create less liquidity because capital diminishes financial fragility and/or “crowds out” deposits. Other contributions suggest the opposite outcome: banks with higher capital...

We address two key issues concerning bank bailout effects on depositor and bank behavior. The first is whether bailouts weaken or strengthen market discipline by depositors through deposit supplies. The second is if bailed-out banks decrease or increase their deposit demands. These questions can...

Governments provide guarantees to banks, such as deposit insurance, often increasing them during financial crises. While risk effects are well researched, impacts on bank output remain largely unexplored. We investigate bank output effects using data from 75 countries on bank liquidity creation,...