The Empirical Study on the Relationship between Bank Liquidity Creation and Capital—Based on Empirical Data from 2004 to 2014 in Chinese Banks

Abstract

This paper investigates the relation between bank liquidity creation and capital in China. This issue is interesting because of the potential impact on “credit weakness” problems from tighter capital requirements which proposed by new capital rules in China. We perform regress analysis in a simultaneous equations model on the panel data of Chinese banks, which mainly includes 28 commercial banks from 2004 to 2014. On the whole, we find very different relations for different types of bank. State-owned commercial banks do not have significant relationship between liquidity creation and capital. National shareholding commercial banks’ liquidity creation and capital are positive correlation. The capital of regional commercial banks has a strongly positive effect on liquidity creation, but liquidity creation has negative impact on capital. These findings support the point that the new capital rules in China do not detrimentally influence “credit weakness” prob lems.