Revisiting the impact of stock market liquidity on bank liquidity creation: Evidence from Malaysia

Abstract

This article examines the impact of stock market liquidity on bank liquidity creation in Malaysia. Our results indicate that a stock market enhances the liquidity creation of banks both on and off the banks’ balance sheets when the market liquidity increases. Further analysis shows that the positive impact of stock market liquidity is evident on the liquidity creation of publicly listed banks as the banks’ cost of equity finance becomes cheaper. Our results are robust to the influence of the 2008 financial crisis and different estimation methods. Our results refute the traditional view that increased stock market liquidity “steals” banks’ business and crowds out bank liquidity creation.