Abstract
The study investigates nonlinearity in the interrelationship between liquidity creation (LC) and bank capital. It addresses the reverse-causality concerns by employing a simultaneous equations model with a two-step system GMM estimator. The data comprises 597 commercial banks in the Asia-Pacific region from 2006 to 2019. The findings indicate a U-shaped bi-directional relationship between bank capital and LC, with a significant moderating effect of bank size. The results also hold for Advanced economies (AEs), Basel II and Basel III periods. However, there is an inverted U-shaped impact of capital on LC in the Emerging market and developing economies (EMDEs). The findings call for coordination between liquidity and capital regulations. Further, policymakers should adopt a tailored regulatory approach for banks instead of uniform blanket regulations, as the latter might prove to be counterproductive.
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