This　paper　applies　the　empirical　methodology　of　panel　Granger-causality　tests　to　test　the　relationship　between　bank　diversification　and　liquidity　creation,　employing　the　panel　vector　autoregression　models　in　a　generalized　method　of　moments　framework.　We　find　that　an　increase　in　the　degree　of　bank　diversification　between　traditional　bank　activities　generating　net　interest　income　and　non-traditional　bank　activities　generating　non-interest　income　reduces　bank　liquidity　creation.　However,　an　increase　in　the　degree　of　bank　diversification　within　non-traditional　bank　activities　leads　to　an　increase　in　bank　liquidity　creation.　In　the　context　of　China＇s　banking　sector,　the　positive　and　negative　aspects　of　bank　diversification　coexist.　In　addition,　we　do　not　find　evidence　of　reverse　causality　between　banks＇　diversification　and　liquidity　creation.　Furthermore,　we　examine　whether　the　investigated　empirical　relationship　will　change　for　heterogeneous　banks　and　find　that　the　relationship　between　bank　diversification　and　liquidity　creation　exhibits　heterogeneity　for　banks　with　various　characteristics.