We present a model in which intermediaries create liquidity by issuing safe debt. There are two types of intermediaries: Traditional banks create liquidity by issuing equity and holding assets to maturity. In contrast, market-based intermediaries create liquidity by selling assets in fire sales in downturns. We show that the reliance on market-based intermediation is naturally excessive. Thus, liquidity creation is inefficient, and the endogenous fire-sale pricing can push the level of safe debt created in equilibrium below its optimum. We argue that standard capital or liquidity regulation are ineffective and optimal macroprudential regulation should instead target market-based intermediation.