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Liquidity creation through efficient M&As: A viable solution for vulnerable banking systems? Evidence from a stress test under a panel VAR methodology

Baltas, Konstantinos N and Kapetanios, George and Tsionas, Efthymios and Izzeldin, Marwan (2017) 'Liquidity creation through efficient M&As: A viable solution for vulnerable banking systems? Evidence from a stress test under a panel VAR methodology.' Journal of Banking and Finance, 83. 36 - 56. ISSN 0378-4266

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Abstract

According to the “cost efficiency - liquidity creation” hypothesis (CELCH), introduced in this paper, a rise in a bank’s cost efficiency level increases its liquidity creation. By employing a novel stress test scenario under a panel VAR methodology, the CELCH and the direction of causality between liquidity creation and cost efficiency are tested. Moreover, using new measures of liquidity creation (Berger and Bouwman, 2009), the question of whether potential bank mergers and acquisitions (M&As) can enhance liquidity creation and generate additional credit channels in the economy is addressed. The robustness of potential consolidation scenarios are evaluated and compared through the use of new “half-life” measures (Chortareas and Kapetanios, 2013). In line with CELCH, the positive impact of cost efficiency on liquidity creation is shown. The empirical evidence further suggests that potential consolidation activity can enhance the flow of credit in the economy. Bank shocks seem to have the most persistent effect on both liquidity creation and cost efficiency. Finally, doubts are cast on the strategies followed by policy authorities regarding the recent wave of M&As in the banking sector.

Item Type: Article
Uncontrolled Keywords: Bank distress, Liquidity risk, Efficiency, Capital structure, Regulation, M&As, PVAR
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
Depositing User: Jim Jamieson
Date Deposited: 03 Aug 2017 14:20
Last Modified: 06 Dec 2018 02:00
URI: http://repository.essex.ac.uk/id/eprint/19863

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