How Does Credit Information Sharing Shape the Cyclicality of Bank Liquidity Creation?

ABSTRACT We investigate the effect of credit information sharing in the banking sector on the fluctuations of bank liquidity creation over the business cycle. Using the Berger and Bouwman comprehensive measure of bank liquidity creation and data representing 354 banks from 40 developing countries between 2012 and 2020, we find that on‐ and off‐balance sheet liquidity creation is procyclical. We also find that credit information sharing significantly reduces the procyclicality of on‐ and off‐balance sheet liquidity creation by increasing banks’ access to interbank funding and enhancing their ability to estimate customer default probabilities more accurately. Our findings suggest that credit information sharing can act as a stabilizing mechanism for bank liquidity creation in developing countries.