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A Study on the Measurement and Determinants of Commercial Bank Liquidity Creation in China

Author: LiChengBin
Tutor: QianXueSong
School: Huazhong University of Science and Technology
Course: Western Economics
Keywords: Liquidity Liquidity creation Bank balance sheet State-owned commercial bank Joint-stock commercial bank
CLC: F832.2
Type: Master's thesis
Year: 2010
Downloads: 105
Quote: 0
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Abstract


As social capital supply and demand intermediary, commercial banks can create liquidity by the structure of assets and liabilities. We introduce a measurement method of liquidity creation which relies on the data of bank balance sheet. It includes a three-step procedure. Firstly, we classify all bank assets and liabilities as liquid, semi-liquid, or illiquid. Secondly, we assign weights to the activities classified in the first step. At last, we construct the liquidity creation measure by combining the activities. We measure the liquidity created by 10 main commercial banks in China over the 2002 to 2008 period. Calculations show that our sample banks created over 14 trillion in 2008. The amount of liquidity created of state-owned commercial bank increased by 140% and the amount of liquidity created of joint-stock commercial bank increased by 280%. The analysis about different types of bank shows the joint-stock commercial bank’ability of liquidity creation is stronger than state-owned commercial bank. Next, this thesis discusses the factors which influence the ability of commercial banks liquidity creation. The empirical results show that the type of assets and liabilities and their term structures are the main determinants of liquidity creation. The mismatched term structure of assets and liabilities is a key factor which leads to Chinese commercial banks to create excess liquidity. In addition, bank capital has a positive effect on liquidity creation. Finally, according to the actual economic situation in China, we discuss the significance and feasibility that we use liquidity creation indexes as the monetary policy intermediary target. And we give the policy advices which are used to control liquidity creation.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Banking system and business
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