Bank efficiency and liquidity creation in the Euro Area: A Bayesian approach

This study delves into the complex relationship between bank efficiency and liquidity creation through a Bayesian stochastic frontier analysis performed on a panel of banks from the Euro Area countries over the period 2014–2022. The findings offer nuanced insights into the factors that influence liquidity creation and highlight the role of technical efficiency in facilitating this process. Effective risk management and efficient resource utilization are crucial in determining a bank’s ability to transform deposits into loans and increase overall liquidity, regardless of the bank’s characteristics of size and capital. The results suggest that policymakers should focus on promoting best practices in bank management to not only stabilize the banking sector but also extend credit to the broader economy.