Research projects 2024

1. “Bank capital and liquidity creation: Evidence from the Russian Experience”
In this project, we examine the relationship between regulatory bank capital and liquidity creation. We test the “financial fragility-crowding out hypothesis ”and the “risk absorption hypothesis ”on the sample of 885 Russian banks over the 2010-2019 period. Inspired by Berger and Bouwman (2009) approach, we develop a liquidity creation measure that simultaneously considers the category and maturity of secondary accounts. After conducting several robustness checks, we report that bank capital is negatively related to liquidity creation which supports the “financial fragility-crowding out hypothesis”. We also show that this relationship is independent of the bank size and the economic cycle. Our findings suggest that the Central Bank of Russia faces a trade-off between financial stability and liquidity creation by the banking system, as tougher regulatory capital requirements decrease banks’ abilities to finance the real sector of the economy.

2. “Predatory Trading in a Rational Market ”
We study predatory trading in a model where the predators and the prey trade with competitive, rational hedgers. Both the prey’s distress and market depth are endogenous. On the one hand, limited depth helps predators move prices to push the prey into distress. On the other hand, the mere anticipation by hedgers of the prey’s fire-sale lowers the current asset price and makes price impact trader-specific. The prey’s price impact decreases before fire sales, while predators’ increases, making predation cheaper for them. The model predicts that predatory trading occurs insufficiently thin markets and shows that short-selling bans may be ineffective against predatory trading.