Interest rates and bank liquidity creation

This paper examines the relationship between the shadow federal funds rate and bank liquidity creation. Using panel data on U.S. commercial banks, we find that higher shadow rates are associated with greater asset-side liquidity creation but lower liability-side liquidity creation, resulting in a decline in total liquidity creation. We also find that banks with higher levels of liquidity creation are more sensitive to changes in the shadow rate. Our results underscore the importance of interest rates in shaping bank liquidity creation.