Financial intermediaries issue the majority of liquid securities, and nonfinancial firms have become net savers, holding intermediaries' debt as cash. This paper shows that intermediaries' liquidity creation stimulates growth -- firms hold their debt for unhedgeable investment needs -- but also...

We propose a dynamic theory of banking where deposits play the role of productive capital as in the classical Q-theory of investment for non-financial firms. A key conceptual innovation of our theory is that the stock of deposits cannot be perfectly controlled by the bank. Demand deposit...

Crises have cleansing effects: Low-quality firms face greater financial shortfalls and invest less than high-quality firms. Public liquidity support preserves the overall production capacity. However, by dampening the cleansing effects, it distorts the quality distribution and reduces the total...

We describe methods for measuring liquidity provision that can be applied to real-time gross settlement payment systems. Using data from CHAPS, the UK large-value payment system, we find that smaller banks tend to provide more liquidity than larger banks, relative to their payment flows. We use...

Banks require access to liquidity intraday in order to settle obligations in payment and settlement systems. The recent financial crisis has highlighted the need for banks to improve their liquidity risk management, including the management of intraday liquidity risk. The FSA's new liquidity...