Bank Liquidity Creation Following Regulatory Interventions and Capital Support

Abstract

We study the effects of regulatory interventions and capital support (bailouts) on banks’ liquidity creation. We rely on instrumental variables to deal with possible endogeneity concerns. Our key findings, which are based on a unique supervisory German dataset, are that regulatory interventions robustly trigger decreases in liquidity creation, while capital support does not affect liquidity creation. Additional results include the effects of these actions on different components of liquidity creation, lending, and risk taking. Our findings provide new and important insights into the debates about the design of regulatory interventions and bailouts.