Internal control and bank liquidity creation: Evidence from China

Liquidity creation is the main function of banks to serve the real economy, and this process is closely related to internal control. Using panel data of Chinese listed commercial banks from 2007 to 2021, this paper studies the impact of internal control on bank liquidity creation. We find that an inverted U-shaped relationship between internal control and bank liquidity creation exists. The effect operates through bank credit risk, shadow banking business, and income structure channels. Furthermore, the inverted U-shaped influence of internal control on liquidity creation is flatter when economic growth slows, and economic policy uncertainty increases. It is also flatter for smaller banks. The findings enrich the research on determinants of bank liquidity creation. [Display omitted] •There is an "inverted U-shaped" relationship between internal control and bank liquidity creation.•Internal control affects bank liquidity creation through bank credit risk, shadow banking and bank income structure.•Inverted U relationship is affected by economic growth and policy uncertainty.