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Banks’ Foreign Currency Revaluations and Liquidity Creation
Emerging Markets Review. 2024.
Sokolov V., Gorodilov Alexey
We study the impact of net revaluations of assets/liabilities denominated in FX on banks’ liquidity creation. We utilize the Russian data and employ the Berger-Bouwman methodology to develop an index that considers the liquidity category and maturity of balance sheet items. We find a positive/negative effect of net revaluations on the asset-side/liability-side components of the liquidity creation. We test the “financial fragility hypothesis” predicting that higher capital reduces banks’ incentives to monitor borrowers and decreases liquidity creation. We find that capital and net evaluations negatively affect liquidity creation, which is driven by banks with FX assets exceeding FX liabilities.