Competition Plays A Moderating Role in The Impact of Liquidity Creation on Bank Capital

Abstract

Introduction/Main Objectives: This study examines the moderating influence of bank competition, proxied by the Lerner index, on the impact of liquidity creation, measured using the Catfat method, on bank capital, proxied by the equity-to-total-assets ratio. Background Problems: Limited academic literature explores how competition moderates the relationship between liquidity creation and bank capital, which is essential for maintaining stability and risk absorption in the banking sector. Novelty: This study fills the gap by demonstrating that the effect of liquidity creation on bank capital depends on the level of bank competition. Research Methods: The study uses purposive sampling, covering 96 banks from 2013 to 2023, and applies panel data regression analysis with Hayes’ method. Control variables include ROA, LDR, NPL, GDP, inflation, and Bank Indonesia interest rates. Findings/Results: The results indicate that competition moderates the negative effect of liquidity creation on bank capital, weakening this impact. This suggests that competition enables banks to maintain higher capital levels. Conclusion: The study highlights the importance of competition in moderating the liquidity creation-capital relationship, with implications for bank management and regulatory policies.