Bank Liquidity Creation, Monetary Policy, and Financial Crises

How well does monetary policy affect bank behavior, particularly during financial crises? What is the role of banks in creating asset bubbles that burst and lead to crises? We address these issues by focusing on bank liquidity creation, a comprehensive measure of bank output that accounts for all on- and off-balance sheet activities. We find that: (1) during normal times, monetary policy affects liquidity creation only for small banks; (2) monetary policy effects are weaker for banks of all sizes during financial crises; (3) high liquidity creation (relative to trend) helps predict future crises after controlling for other factors