Liquidity Creation, Investment, and Growth
- Prof. Thorsten BECK, City, University of London
Liquidity creation (the transformation of liquid liabilities into illiquid assets) by banks is positively associated with economic growth at both country and industry levels. Liquidity creation boosts tangible, but not intangible investment and does not contribute to growth in countries with a high share of intangible-asset industries. These results are consistent with a model in which liquidity creation fosters investment only if it is sufficiently tangible, because intangible assets have low collateral value and are easy to divert. Together, these findings provide new insights into the function of banks, but also highlight their more limited role in supporting innovative industries.