Liquidity Creation and Bank Performance of Syrian Banks before and during the Syrian War

Ahmad Sahyouni,Man Wang

doi:10.3390/ijfs7030040

Abstract

This paper estimates the amount of liquidity created by Syrian banks between 2004 and 2016, and further investigates the effect of liquidity creation on bank performance, controlling for a set of bank-level, industry-level, and macroeconomic variables. The findings show bank liquidity creation improved during the pre-war period and showed positive figures, but started to decline sharply during wartime. The results also show a negative relationship between liquidity creation and bank profitability (return on assets) during wartime; however, this relationship was insignificant before the war. Finally, this study conducted robustness checks to confirm its findings.

Highlights

Banks have indispensable roles in supporting the economy of a country through their liquidity creation and risk transformation functions; previous studies have often focused on the latter function
The Syrian banking sector has been operating during wartime since 2011, which is a unique case has never been studied before
This study aims to investigate the effect of liquidity creation on bank profitability for commercial banks in Syria and to test the effect of the Syrian war on this relationship

Summary

Introduction

Banks have indispensable roles in supporting the economy of a country through their liquidity creation and risk transformation functions; previous studies have often focused on the latter function. According to the liquidity creation theory, banks finance their illiquid assets with liquid liabilities to create liquidity for their customers (Bryant 1980; Diamond and Dybvig 1983). These institutions conduct off-balance sheet activities, such as loan commitments (Holmström and Tirole 1998; Kashyap et al 2002), to create liquidity. The Syrian economy was affected during wartime, but recently, the banking sector has begun to recover and record high profits. Private Banks as a whole achieved about 131 billion Syrian pounds (SYP) in profits in 2016 compared to about 79 billion SYP in 2015. Bank earnings rose by 65% in one year and 748% in three years

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