Research On The Impact Of Liquidity Creation On Commercial Banks’ Risk Taking

As the core of the entire financial market financing system,commercial banks play a crucial role in the stable development of China’s economy,and therefore their risk-taking behaviour has been widely concerned by scholars.In recent years,the frequent occurrence of liquidity problems in the interbank market has led to the gradual emergence of the importance of banks’ liquidity creation function.Liquidity creation is a means for commercial banks to serve the real economy.On the one hand,liquidity creation provides liquidity to the financial market,which is important for promoting rapid economic growth;on the other hand,liquidity creation causes a mismatch in the timing of funds,leading to a structural shortage of funds,which can have an impact on the operational safety of commercial banks.Therefore,it is essential to study the impact of liquidity creation on the risk-taking of commercial banks in China.Based on a theoretical analysis of the impact of liquidity creation on commercial banks’ risk-taking,this thesis collects unbalanced panel data of 276 commercial banks in China from 2012-2021 and uses a systematic GMM model to conduct regressions to analyse the impact of liquidity creation on commercial banks’ risk-taking.First,a benchmark regression model is built to test the relationship between liquidity creation and the level of risk-taking of commercial banks;then heterogeneity is tested from the perspectives of bank size and the scope of bank business operations;finally,from the perspective of capital regulation,a moderating effect model is constructed to analyse the mechanism by which liquidity creation affects the risk-taking of commercial banks.The main findings of this thesis are:(1)liquidity creation is positively related to commercial banks’ risk-taking.The empirical study shows that an increase in liquidity creation raises the level of risk-taking of banks.(2)Among commercial banks,there is heterogeneity in the impact of liquidity creation on their risk-taking.The heterogeneity test study found that changes in risk-taking levels of smaller banks are more sensitive to the impact of liquidity creation than those of larger banks.Changes in risk-taking are more sensitive to liquidity creation for regional banks than for national banks.(3)Strengthening capital regulation can mitigate the positive impact of liquidity creation on bank risk-taking.On this basis,the article makes recommendations to China’s financial regulators and commercial banks respectively in terms of improving regulatory policies,preventing crises in the financial system and improving their resilience to risk.