Increased bank competition leads to reduced liquidity creation, impacting financial stability.
The article explores how competition among banks affects their ability to create liquidity. By studying Czech banks from 2002 to 2010, the researchers found that increased competition actually reduces the amount of liquidity banks can provide. This is because more competition makes banks more financially fragile, causing them to decrease their lending and deposit activities. Therefore, policies that promote competition in the banking industry may lead to less liquidity being available from banks.