Financial Crises And Bank Liquidity Creation

Financial crises and bank liquidity creation are often connected. The authors examine this connection from two perspectives. First, they examine the aggregate liquidity creation of banks before, during, and after five major financial crises in the U.S. from 1984:Q1 to 2008:Q1. They uncover numerous interesting patterns, such as a significant build-up or drop-off of "Abnormal" liquidity creation before each crisis, where "Abnormal" is defined relative to a time trend and seasonal factors. Banking and market-related crises differ in that banking crises were preceded by abnormal positive liquidity creation, while market-related crises were generally preceded by abnormal negative liquidity creation.