We review the contemporary theory of financial intermediation. The focus is on contributions in the past 15 years or so that have advanced our understanding of why financial intermediaries exist, the credit allocation and other services they provide in spot and forward credit markets, the contractual nature and allocational consequences of the claims they issue, and the optimal design of bank regulation. Journal of Economic Literature Classification Numbers: 310, 312, and 314.

Contemporary Banking Theory

The fallout of the Global Financial Crisis demonstrated the importance of bank liquidity creation (LC) for the economies. This study attempts to analyze the implications of LC for promoting the financial stability of banks. To address this question, a dynamic panel estimation has been employed for 1046 firm-year observations of commercial banks operating in one of the fastest-growing emerging markets, India, covering the period 2007 to 2019. The results suggest that LC enhances the financial stability of banks. However, this impact varies according to bank size. Further, private sector banks are found to be more stable than public sector banks. Thus, the study emphasizes the need for LC. It also suggests that ‘one-size-fits-all’ liquidity regulations are not optimal for the stability of banks.

Nacera Yeddou

Papers

Bank liquidity creation: Does ownership structure matter?