Liquidity Risk and Performance of Banking System in Malaysia

Abstract

Recent financial crisis raised the issue of understanding the liquidity risk of financial assets and institutions. This paper studies the ability that exposure and sensitivity to liquidity risk has in banking system in Malaysia. Purpose - This paper aims to analyze the liquidity risks and disclosure as well as to draw the relationship between liquidity risks and financial performance measures using deposits, cash, liquidity gap and also non-performing loans as the indicator to the banking system in Malaysia and evaluate the effect on banks’ capital and reserve. Design/methodology/approach - Data are retrieved from the utilizing journals, books, Thompson Data Stream, balance sheet, income statements and report by Bank Negara Malaysia for the period 1997-2012. Multiple regressions are applied to assess the impact of liquidity risk on banks’ capital and reserve. Findings - The results of the multiple regressions showed that liquidity risk affects banks capital and reserve significantly, with non-performing loan (NPLs), as the exacerbating the liquidity risk. They have a negative relationship with deposit, cash and liquidity gap. Research limitations/implications - The period studied in this paper is one year, due to availability of data. However, the sample period does not impair the findings since the sample includes 56 banks, which constitute the main part of the Malaysian banking system. Moreover, only NPLs do not used to measure of performance. Economic factors contributing to liquidity risk are not covered in this paper. Originality/value - This is paper are refer to journal who is research about the Pakistani banking system but the result from that journal are not influence the result in this paper. This paper helps in understanding the factors of liquidity risk and performance of banking system. Consequently, understanding their impact on the bank’s capital and reserve of the banking system. Paper type - Research paper