Abstract
To analyze the effects of government debt securities on the liquidity risk and profitability of banks in Cape Verde, this research employs an unbalanced panel dataset from 2000 to 2017 on the activity of all commercial banks operating at the end of 2017 (seven in total). The study employs models with lagged regressors, estimated by the ordinary least squares estimation method. The results show that government debt securities have no effect on bank liquidity risks, but they have an effect on bank profitability, with government debt securities having a positive impact on assets’ profitability, in the long run. When government debt securities include Consolidated Securities of Financial Mobilization, the effects on profitability are negative both in the short and the long run. The study concludes that banks’ strategy to hold the more conventional government debt securities as safe assets and risk-free alternative for the domestic application of liquidity surpluses is appropriate and a viable way to gain profitability in the long run. These results show the negative effect of government debt securities when the Consolidated Securities of Financial Mobilization are included, which helps to explain the low average profitability rates of Cape Verde’s banks, when compared to other similar sub-Saharan African countries, like Mauritius or Seychelles.
Highlights
Cape Verde is a small insular country with poor natural resources and whose economy depends essentially on the tourism sector
In order to analyze the effects of public debt securities on the liquidity and profitability of banks in Cape Verde, eight regression models were estimated for panel data using the method of ordinary least squares (OLS), in an approximation to the models proposed by Singh and Sharma (2016)
+ β gdpit−1 + β gdpit−2 + ai + μit where ∆lriskit denotes the variation in liquidity risk, cashit represents cash and deposits at the central bank, ROAit is the return on bank i’s assets at time t and ROEit is the return on equity of bank i’s at time t
Summary
Cape Verde is a small insular country with poor natural resources and whose economy depends essentially on the tourism sector. As stated by Ozkan et al (2010), higher degrees of competitiveness and liquidity of the banking sectors are related to better conditions in the public securities market Since these securities are of low yield (compared to credits, for example), the increase in the stock of government bonds, as a specific factor for banks, is expected to have a negative effect on the profitability of banks’ assets in Cape Verde. Following this introduction, this article is structured as follows: Section 2 presents a review of the literature on the subject under study, with emphasis on the determinants of banks’ liquidity risk and profitability; in Section 3, the data and methodology are described; Section 4 presents the data analysis and empirical results; and Section 5 presents the conclusion of the study. It is crucial to Review analyze the relationship between public debt and the performance of the bank
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