Top

Journal of Financial Services Research

Published in:

21-04-2021

Liquidity Creation and Trust Environment

Authors: Jérémie Bertrand, Paul-Olivier Klein, Jean-Loup Soula

Published in: Journal of Financial Services Research | Issue 3/2022

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

Abstract

Trust towards banks plays a central role in theoretical literature. Diamond and Dybvig (J Polit Econ 91:401–419, 1983) argue that in a trustworthy environment banks can easily collect deposit foster banking activity and asset transformation. Diamond and Rajan (J Polit Econ 109:287–327, 2001) posit that a high trust environment discourages banks from creating liquidity. To address these conflicting views, the current study measures liquidity creation using Berger and Bouwman’s (Rev Financ Stud 22:3779–3837, 2009) methodology, then assesses the level of trust in the environment with four proxies and two additional instruments deployed in previous research. The results confirm a positive effect of trust in banks on liquidity creation, especially for small or state-chartered banks and during economic downturns. The results are robust to time effects and potential endogeneity concerns.

previous article How Banks Price Loans for LBOs: an Empirical Analysis of Spread Determinants *

next article Implications for Bank Risk when Directors are Related to Minority Shareholders

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Available only for authorised users

A deposit insurance scheme could have a similar effect, by reducing banks’ financial fragility and incentives to create liquidity. Fungáčová et al. (2017) explore this possibility but do not find a significant impact.

http://web.mit.edu/cbouwman/www/data.html, last visited on 14/01/2019.

In this calculation, we don’t take into account individuals answering “no opinion”.

To test the sensitivity of our results, we use the sum of the “great deal” and “quite a lot” responses, and the average index of confidence. Results remain qualitatively similar and are available on request.

Including the whole sample in the estimation yields a negative, significant coefficient for Bank Failure for both on- and off-balance sheet liquidity creation.

Bernard Madoff’s fraud resulted in a momentous scandal in 2008. He ran a multi-billion-dollar Ponzi scheme for almost 20 years and defrauded more than 4,000 people, both individuals and institutions, for which he was sentenced to 150 years in prison. Hurt (2009) provides a detailed narrative of the scam.

Algan Y, Cahuc P (2010) Inherited trust and growth. Am Econ Rev 100:2060–2092CrossRef

Allen F, Santomero AM (1997) The theory of financial intermediation. J Bank Financ 21:1461–1485CrossRef

Allen F, Gale D (2004) Financial intermediaries and markets. Econometrica 72:1023–1061CrossRef

Basov Suren, Bhatti MI (2013) Optimal contracting model in a social environment and trust-related psychological costs. B.E. J Theor Econ 13:271–284CrossRef

Beatriz M, Coffinet J, Nicolas T (2018) Relationship lending and SMEs’ funding costs over the cycle: why diversification of borrowing matters. J Bank Financ. https://doi.org/10.1016/j.jbankfin.2018.12.007

Becchetti L, Conzo P (2011) Enhancing capabilities through credit access: creditworthiness as a signal of trustworthiness under asymmetric information. J Public Econ 95:265–278CrossRef

Berger AN, Udell GF (2002) Small business credit availability and relationship lending: the importance of bank organisational structure. Econ J 112:F32–F53CrossRef

Berger AN, Bouwman CHS (2009) Bank liquidity creation. Rev Financ Stud 22:3779–3837CrossRef

Berger AN, Bouwman CHS (2012) Bank liquidity creation, monetary policy, and financial crises. SSRN Scholarly Paper. Social Science Research Network, Rochester

Berger AN, Bouwman CHS (2013) How does capital affect bank performance during financial crises? J Financ Econ 109:146–176CrossRef

Berger AN, Bouwman C (2015) Bank liquidity creation and financial crises. Academic Press, Cambridge

Berger AN, Sedunov J (2017) Bank liquidity creation and real economic output. J Bank Financ 81:1–19CrossRef

Berger AN, Molyneux P, Wilson JOS (2014) The Oxford handbook of banking, 2nd edn. OUP Oxford, Oxford

Berger AN, Bouwman CHS, Kick T, Schaeck K (2016) Bank liquidity creation following regulatory interventions and capital support. J FinancIntermed 26:115–141

Bertsch C, Qi Y, Hull I, Zhang X (2018) The role of trust in online lending. Working Paper, 54

Bhattacharya S, Thakor AV (1993) Contemporary banking theory. J FinancIntermed 3:2–50

Blair CE, Kushmeider RM (2006) Challenges to the dual banking system: the funding of bank supervision. FDIC Bank Rev 18:1–22

Bolton P, Freixas X, Gambacorta L, Mistrulli PE (2016) Relationship and transaction lending in a crisis. Rev Financ Stud 29:2643–2676CrossRef

Bräuning F, Fecht F (2017) Relationship lending in the interbank market and the price of liquidity. Rev Finance 21:33–75

Buriak A, Vozňáková I, Sułkowska J, Kryvych Y (2019) Social trust and institutional (bank) trust: empirical evidence of interaction. Econ Sociol 12:116–129CrossRef

Casu B, di Pietro F, Trujillo-Ponce A (2018) Liquidity creation and bank capital. J Financ Serv Res 56:307–340

Chari VV, Jagannathan R (1988) Banking panics, information, and rational expectations equilibrium. J Financ 43:749–761CrossRef

Chen D, Liu X, Wang C (2016) Social trust and bank loan financing: evidence from China. Abacus 52:374–403CrossRef

Devos T, Spini D, Schwartz SH (2002) Conflicts among human values and trust in institutions. Br J SocPsychol 41(4):481–494CrossRef

Diamond DW, Dybvig PH (1983) Bank runs, deposit insurance, and liquidity. J Polit Econ 91:401–419CrossRef

Diamond DW, Rajan RG (2000) A theory of bank capital. J Financ 55:2431–2465CrossRef

Diamond DW, Rajan RG (2001) Liquidity risk, liquidity creation, and financial fragility: a theory of banking. J Polit Econ 109:287–327CrossRef

Fidrmuc J, Fungáčová Z, Weill L (2015) Does bank liquidity creation contribute to economic growth? Evidence from Russia. Open Econ Rev 26:479–496CrossRef

Flannery MJ (1994) Debt maturity and the deadweight cost of leverage: optimally financing banking firms. Am Econ Rev 84:320–331

Fungáčová Z, Turk-Ariss R, Weill L (2015) High liquidity creation and bank failures. IMF Working Paper 15

Fungáčová Z, Weill L, Zhou M (2017) Bank capital, liquidity creation and deposit insurance. J FinancServ Res 51:97–123

Gatev E, Strahan PE (2006) Banks’ advantage in hedging liquidity risk: Theory and evidence from the commercial paper market. J Financ 61:867–892CrossRef

Grayson K, Johnson D, Chen D-F (2008) Is firm trust essential in a trusted environment? How trust in the business context influences customers. J Mark Res 45:241–256CrossRef

Guiso L (2010) A trust-driven financial crisis. Implications for the future of financial markets. EUI Working Papers

Guiso L, Sapienza P, Zingales L (2004) The role of social capital in financial development. Am Econ Rev 94:526–556CrossRef

Guiso L, Sapienza P, Zingales L (2008) Trusting the stock market. J Financ 63:2557–2600CrossRef

Horvath R, Seidler J, Weill L (2016) how bank competition influences liquidity creation. Econ Model 52:155–161CrossRef

Hurt C (2009) Evil has a new name (and a new narrative): Bernard Madoff. Michigan State Law Review Winter, 947–987

Jansen D-J, Mosch RHJ, van der Cruijsen CAB (2015) When does the general public lose trust in banks? J FinancServ Res 48:127–141

Järvinen RA (2014) Consumer trust in banking relationships in Europe. Int J Bank Mark 32:551–566CrossRef

Jiang L, Levine R, Lin C (2019) Competition and bank liquidity creation. J Financ Quant Anal 54:513–538CrossRef

Johnson CA, Rice T (2008) Assessing a decade of interstate bank branching. Wash Lee Law Rev 65:73–128

Kashyap AK, Rajan R, Stein JC (2002) Banks as liquidity providers: an explanation for the coexistence of lending and deposit-taking. J Financ 57:33–73CrossRef

Kim M, Surroca J, Tribó JA (2014) Impact of ethical behavior on syndicated loan rates. J Bank Financ 38:122–144CrossRef

Knell M, Stix H (2015) Trust in banks during normal and crisis times—evidence from survey data. Economica 82:995–1020CrossRef

Laeven L, Levine R (2009) Bank governance, regulation and risk taking. J Financ Econ 93:259–275CrossRef

Lins KV, Servaes H, Tamayo A (2017) Social capital, trust, and firm performance: the value of corporate social responsibility during the financial crisis. J Financ 72:1785–1824CrossRef

Moro A, Fink M (2013) Loan managers’ trust and credit access for SMEs. J Bank Financ 37:927–936CrossRef

Myers SC, Rajan RG (1998) The paradox of liquidity. Q J Econ 113:733–771CrossRef

Newton K, Norris P (2000) Confidence in public institutions: faith, culture, or performance? In: Pharr SJ, Putnam RD (eds) Disaffected Democracies. Princeton University Press, Princeton, pp 52–73

O’Hara M, Shaw W (1990) Deposit insurance and wealth effects: the value of being “too big to fail”. J Financ 45:1587–1600

Orphanides A, van Norden S (2005) The reliability of inflation forecasts based on output gap estimates in real time. J Money, Credit, Bank 37:583–601CrossRef

Postlewaite A, Vives X (1987) Bank runs as an equilibrium phenomenon. J Polit Econ 95:485–491CrossRef

Putnam R (1993) Making democracy work: civic traditions in modern Italy. Princeton University Press, Princeton

Repullo R (2004) Capital requirements, market power, and risk-taking in banking. J FinancIntermed 13:156–182

Saparito PA, Chen CC, Sapienza HJ (2004) The role of relational trust in bank-small firm relationships. AcadManag J 47:400–410

Sapienza P, Zingales L (2012) A trust crisis. Int Rev Financ 12:123–131CrossRef

Shin HS (2009) Reflections on northern rock: the bank run that heralded the global financial crisis. J Econ Perspect 23:101–119CrossRef

Stevenson B, Wolfers J (2011) Trust in public institutions over the business cycle. Am Econ Rev 101:281–287CrossRef

Stiroh KJ, Strahan PE (2003) Competitive dynamics of deregulation: evidence from U.S banking. J Money, Credit, Bank 35:801–828CrossRef

Tang Y, Deng C, Moro A (2017) Firm-bank trusting relationship and discouraged borrowers. RMS 11:519–541CrossRef

Thakor AV (2005) Do loan commitments cause overlending? J Money, Credit, Bank 37:1067–1099CrossRef

van der Cruijsen C, de Haan J, Jansen D-J (2016) Trust and financial crisis experiences. Soc Indic Res 127:577–600CrossRef

White EN (2011) “To establish a more effective supervision of banking”: how the birth of the fed altered bank supervision, National Bureau of Economic Research Working Paper Series

Wu W, Firth M, Rui OM (2014) Trust and the provision of trade credit. J Bank Financ 39:146–159CrossRef

Yang K (2006) Trust and citizen involvement decisions: trust in citizens, trust in institutions, and propensity to trust. AdmSoc 38(5):573–595

Title: Liquidity Creation and Trust Environment
Authors: Jérémie Bertrand
Paul-Olivier Klein
Jean-Loup Soula
Publication date: 21-04-2021
Publisher: Springer US
Published in: Journal of Financial Services Research / Issue 3/2022
Print ISSN: 0920-8550
Electronic ISSN: 1573-0735
DOI: https://doi.org/10.1007/s10693-021-00353-0