The double-edged effect of bank liquidity creation efficiency on systemic risk: Evidence from China.

ABSTRACT: Bank liquidity creation fosters economic growth while entailing liquidity mismatch risk. This study explores whether improving bank efficiency during liquidity creation can mitigate systemic risks. We propose a bank liquidity creation efficiency measure based on a stochastic frontier approach to analyze Chinese commercial listed banks from 2000-2021. Through systemic risk decomposition, we find that higher profit efficiency alleviates individual tail risk but strengthens system linkage for Chinese banks, representing a double-edged effect. Further analysis reveals that high profit efficiency is associated with more investment in real estate and higher risk-taking on loans. Banks' digital transformation can help alleviate the dilemma of being too connected to the system. The results provide

SUBMITTER: Tan S 

PROVIDER: S-EPMC11563395 | biostudies-literature | 2024

REPOSITORIES: biostudies-literature