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Competition, liquidity creation and bank stability

journal contribution
posted on 2024-01-12, 00:20 authored by VT Tran, Hoa NguyenHoa Nguyen
AbstractWe examine the conditioning role of competition in affecting the relationship between liquidity creation and bank risk in a sample of US banks from 2001 to 2016. We find aggregate evidence that competition is related to bank fragility as proxied by the Z‐score both directly and indirectly through its interaction with liquidity creation. However, when the ex‐ante level of liquidity creation is low and/or competition is low to moderate, competition is associated with an improvement in bank risk at a given level of liquidity creation. In addition, the joint fragility effect of competition and liquidity creation manifests more strongly, in an economic sense, in poorly capitalised banks and large banks with assets of more than $3 billion. Our findings emphasise the crucial role of targeted competition regulations in ensuring bank solvency and systemic stability while maintaining a robust level of competition.

History

Journal

Accounting and Finance

Location

London, Eng.

ISSN

0810-5391

eISSN

1467-629X

Language

eng

Notes

In press

Publication classification

C1 Refereed article in a scholarly journal

Publisher

Wiley

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