Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/253394 
Authors: 
Year of Publication: 
2022
Series/Report no.: 
Deutsche Bundesbank Discussion Paper No. 14/2022
Publisher: 
Deutsche Bundesbank, Frankfurt a. M.
Abstract: 
We study the effects of interest rate shocks (IRS) on banks' liquidity creation. A unique supervisory data set from the Deutsche Bundesbank allows identifying banks' liquidity creation for the real economy and the effects of banking market competition. Here, we employ a novel approach to account for IRS that are both unexpected and effective for a bank's business model. We find that higher individual pricing power in the market lowers banks' liquidity creation, which is in line with theory that monopolistic firms undersupply the market when utilizing their high pricing power in the bank competition-liquidity creation nexus. While positive IRS per se lead to an increase in bank liquidity creation, we find that a high bank-individual pricing power curbs this impact on liquidity creation significantly. Moreover, we show that monetary policy was most effective during the global financial crisis and for well-capitalized banks, whereas periods of low interest rates are characterized by the persistent increase in liability-side liquidity creation.
Subjects: 
bank liquidity creation
unexpected monetary policy
low interest rate environment
financial crisis
financial markets regulation
banking market competition
dynamic GMM
JEL: 
G21
G28
G30
C23
ISBN: 
978-3-95729-882-9
Document Type: 
Working Paper

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