Abstract
This study is focused on liquidity risk analysis in order to identify if this risk affects the profitability of Commercial Banks operating in Albania. The paper includes the identification, the analysis and the management of this type of risk. Through numerical analysis it will be studied the quantitative effect of liquidity risk on the profitability of commercial banks in Albania during the period 2005-2015. Following the study, liquidity risk is expected to have a considerable effect on the profitability of Commercial Banks operating in Albania. The analysis is based on an empirical study with secondary qualitative and quantitative data. This study provides a contribution within the identification of liquidity risk factors that affect more the profitability of the Albania Banks and the finding of a scientific solution in order to manage this risk in a more efficient way. The recommendations derived from this study will serve to young researchers of academic area and professional field. Also, this paper will create new discussions on risk management instruments used in the Albanian banking system. Keywords : Profitability, Liquidity risk, Commercial banks, Albania
Highlights
Over the past six decades since Markowitz’s seminal paper of 1952 on portfolio selection, and most financial theories and models assumed markets were frictionless, in traditional asset pricing models, liquidity plays no role at all because it is assumed away
Conflicting to their earlier establishment on the relationship with net interest margin, they realized that liquidity risk is negatively related to return on average assets and inversely related to return on average equity
In order to determine the effect of liquidity risk management on banks profitability the Ordinary least squares (OLS) methode is used through applying the statistical program Eviews on the quantitative data published by the Bank of Albania for the period 2005 - December 2015
Summary
Over the past six decades since Markowitz’s seminal paper of 1952 on portfolio selection, and most financial theories and models assumed markets were frictionless, in traditional asset pricing models, liquidity plays no role at all because it is assumed away. Despite the increased efficiency in many banks resulting from holding higher positions of liquid assets, profitability has severely suffered. While it is generally agreed that there is a negative relationship between liquidity and bank profitability there is counter evidence which shows the need to consider the tradeoff between resilience to liquidity shocks and cost of holding less profitable liquid assets as the latter is assumed to impact on the bank’s ability to take advantage of opportunities arising in the market which may result in increase in revenue, capital or ability to extend capital credit (Bordeleau and Graham 2010).
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