The Effect Of Competition On Commercial Banks' Liquidity Creation

In China,commercial banks are still the main financing channel for enterprises.Thus China is still an indirect financing economy.Banks are responsible for providing liquidity and allocating the risk of term.Therefore,commercial banks are the main bodies of creating liquidity in China.Banks work on creating liquidity along with risks.The primary cause of the fragility of bank system is maturity mismatch of occupation andwithdrawal.Thus,the creation of liquidity is not the more the better.If all liquid liabilities turn into illiquid assets,it can lead to shortage of money.The liquidity creation should match the economic development level and effective financing demand,if not,it may result in excess liquidity and spark the financial crisis.Competition stimulates banks strengthening traditional business and developing new business to promote their competitive capacity.The change of business and product structure impacts the liquidity creation of commercial banks and the stability of financial market.The paper focuses on the relationship between competition and liquidity creation.First,the paper shows domestic and foreign research on the index of competition and liquidity creation and the relationship between them.Then,the paper calculates the overall liquility creation,on-balance sheet liquidity creation and off-balance sheet liquidity creation using Berger & Bouwman method and indexs of competition HHI,CR4,Lerner,level of financial openness.Based on the data of balance sheets and income statements of Chinese and American commercial banks,the paper tests the impact of competition on banks' liquidity creation.Conclusions shows that the less competitive the market becomes,the more overall liquidity creates,no matter based on Chinese or American empirical data.However,there are some differences.For Chinese banks,overall liquidity creation and on-balance sheet liquidity creation show the same result that the higher concentration,the more liquidity creation.While off-balance sheet liquidity creation is little correlated with competition.For American banks,overall liquidity creation and off-balance sheet liquidity creation have the same result that the market concentration and liquidity creation have positive correlation.However,on-balance sheet liquidity creation and market concentration have negative correlation.To test the robustness of the model,the paper uses commercial service exports and Secure Internet servers as the instrument variables for HHI to control for the endogeneity problem.By contrasting the estimated coefficients of Fixed(Random)Effect Model with IV-2SLS?IV-GMM Model,the paper concludes that the result is robust even after controlling for endogeneity issues.Commerical banks may forecast the change of liquidity creation along with the development the market structure according to the result.For regulators,they can adjust the access conditions of innovative business and the process of financial openness on the basis of the relationship between competition and liquidity creation to better prevent excess liquidity.