To examinewhether the interrelationships among liquidity creation,regulatory capital, and bank profitability are sensitive to bank size, wesort the sample banks into large, medium, and small banks. Panel A ofTable 4 shows some evidence that regulatory capital affects liquiditycreation for all banks although the impact appears strongest for smallbanks. Furthermore, the effect of capital on liquidity creation is sensitiveto howthe capital ratio ismeasured. For example, the effect of regulatorycapital is positive for small banks using CARA and CARC, but insignificantusing CARB.Panel B further shows thatwhile liquidity creation has a positive impacton banks' capital, such impact is confined to small banks only.Taken together, the results in Table 4 suggest that the positive bidirectionalrelationship between regulatory capital and liquidity creation islargely driven by small banks.Panel C in Table 4 shows that the effects of liquidity creation andregulatory capital on bank profitability are also not uniform acrossbank size. We find evidence that both liquidity creation and regulatorycapital have a negative impact on bank profitability althoughsuch an impact is once again limited to small banks. Our resultsare consistent with Goddard, McKillop, and Wilson (2008) andCebenoyan and Strahan (2004) who suggest that small banks' profitabilitytends to be more capital dependent as large banks have ahigher propensity to engage in more off-balance sheet or fee-basedactivities that generate higher volatile revenues with less capital.Overall, the results are driven by small banks that make up a largeproportion of our sample.