AbstractLiquidity creation is a core function of banks and an economic service of substantial importance to the economy. This chapter reviews and synthesizes the theoretical and empirical literature on bank liquidity creation. The focus is on the economics of bank liquidity creation, both in the traditional relationship banking context and in the shadow banking context. The related prudential regulation issuespertaining mainly to capital requirements and liquidity requirementsare also discussed. A historical overview is provided, starting in the early 1800s and ending with Basel III and the DoddFrank Act. Open research questions are identified.
