Abstract
The study sheds new light on the link between the economic cycle fluctuation and the financial market by empirically investigating the cyclical patterns of bank liquidity. To draw a comprehensive picture, we conduct our analysis based on multiple different liquidity dimensions of the current liquidity position commonly used in traditional research streams, the long-term liquidity inspired by Basel III guidelines, and the conceptual and quantitative definition to measure liquidity creation of banks. Using a dynamic panel of commercial banks from 2007 to 2019 in Vietnam, we find that long-term bank liquidity and liquidity creation are countercyclical, while the current liquidity position is procyclical. The findings support the thesis that banks take less liquidity risk during economic upturns but tend to be less risk-averse during economic downturns. The estimation results are robust across alternative versions of the generalised method of moments and bank liquidity measures.
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