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This paper generates an optimum bank liquidity creation benchmark by tracing an efficient frontier in liquidity creation (bank intermediation) and questions why some banks are more efficient than others in such activities. Evidence reveals that medium size banks are most correlated to efficient frontier. Small (large) banks - focused on traditional banking activities - are found to be the most (least) efficient in creating liquidity in on-balance sheet items whereas large banks – involved in non-traditional activities – are found to be most efficient in off-balance sheet liquidity creation. Additionally, the liquidity efficiency of small banks is more resilient during the 2007-2008 financial crisis relative to other banks.
Author(s):
Jean-Loup Soula
University of Strasbourg
France
Iftekhar Hasan
Gabelli School of Business, Fordham University
United States