THE RELATIONSHIP BETWEEN LIQUIDITY CREATION AND DIVERSIFICATION IN BANKING: A COMPREHENSIVE LITERATURE REVIEW

Bank diversification and liquidity creation: Panel Granger-causality evidence from China

Liquidity creation through efficient M&As: A viable solution for vulnerable banking systems? Evidence from a stress test under a panel VAR methodology

Foreign ownership and liquidity creation in China’s banking sector

In the context of increasing concern about financial stability and the role of technology in shaping the banking sector, there is growing interest in understanding the impact of Fintech on liquidity creation among banks, particularly in emerging markets like Vietnam. This paper explores the impact of Fintech adoption on banks’ liquidity creation in Vietnam. The analysis is based on a panel dataset at the bank level, encompassing 23 listed commercial banks in Vietnam from 2010 to 2022, comprising 276 firm-year observations. Through text analysis, we construct a Fintech index using Python to extract keywords from the banks’ annual reports. Using a two-way fixed effect regression model, the results suggest that fintech adoption enhances and has a notable positive impact on the liquidity creation capabilities of Vietnamese listed banks. Banks with higher FinTech adoption levels generated more liquidity creation on the asset side, liability side, and total liquidity creation. Heterogeneity analysis suggests the association between fintech adoption and bank liquidity creation is not dependent on the bank's size, capital ratio, or market power. The study contributes by uncovering the substantial positive influence of fintech adoption on liquidity creation in Vietnamese listed banks, offering policymakers insights to promote fintech adoption and advance regulatory frameworks to support innovation in the banking sector.

This paper examines the effects of macro-financial shocks on bank liquidity creation in Mongolia, a developing and commodity-exporting economy, using a structural Bayesian vector autoregression (SBVAR). Ten structural shocks (three external and seven domestic shocks) are identified using a triangular factorization. The main results are (i) the measured bank liquidity creation (as a share of total assets) is procyclical and negatively correlated with the liquidity coverage ratio in the banking sector; (ii) external shocks (the US monetary policy, Chinese economic activity, and changes in the global commodity market) have statistically significant and economically major effects on the liquidity creation. Lending rate, NPL ratio, foreign exchange reserves, and competition in the banking sector are key domestic determinants of liquidity creation; (iii) liquidity creation’s main components respond differently to the US federal funds rate and lending rate shocks. External and financial shocks have contributed to the liquidity creation passing through movements in (illiquid assets + liquid liabilities) component; (iv) monetary policy can be an effective counter-cyclical policy instrument in stabilizing the economic and financial cycles.

Chapter 8 - How Much Liquidity Do Banks Create During Normal Times and Financial Crises?

PurposeThis study aims to investigate the impact of liquidity creation (LC) on the profitability and stability of banks while considering the moderating role of corruption.Design/methodology/approachPanel data from 23 conventional banks and five Islamic banks in Pakistan spanning from 2008 to 2021 were used for analysis. The study used fixed effect and random effect models, along with the generalized method of moments estimation to ensure robustness of the results.FindingsThe study reveals a negative relationship between LC and banking profitability, but a positive association with banking stability. Additionally, corruption is found to play a moderating role in the relationship between LC, profitability and stability in the banking sector of Pakistan.Research limitations/implicationsThe findings have practical implications for bank managers and investors, emphasizing the negative relationship between LC and profitability in Pakistan. Moreover, the study highlights the significant impact of corruption on bank performance, which can guide policymakers in formulating strategies to strengthen the banking sector and prevent financial turmoil in the future.Originality/valueThis study makes a significant contribution to the existing literature by examining the moderating role of corruption in the relationship between LC, profitability and stability in both conventional and Islamic banks.

This study examines the interrelationship between liquidity creation, regulatory capital, and bank profitability in the Gulf Cooperation Council (GCC) banking sector. Using dynamic panel data and the ?generalized method of moments? (GMM) estimator for the period 2009-2023, we explore how these variables influence each other in a region characterised by oil-dependent economies and a dual banking system (comprising both Islamic and conventional banks). Our findings reveal a negative bidirectional relationship between liquidity creation and regulatory capital, supporting the financial fragility hypothesis. However, this relationship varies significantly across bank types. We also find a positive association between liquidity creation and bank profitability, suggesting that banks generating more liquidity tend to perform better, which is contrary to the bankruptcy cost theory. In contrast, regulatory capital negatively affects bank profitability, although the magnitude and direction of this relationship depend on the capital definition used. By focusing on this unique regional and institutional setting while incorporating bank type heterogeneity, this study offers novel insights into the regulatory-performance-liquidity nexus and contributes to the literature on banking in emerging economies.

Purpose: This study aims to investigate the liquidity creation determinants in the banking sector of Pakistan. Design/Methodology: Panel data from 24 banks is used for the period of 12 years (2011-2022). The impact of macroeconomic variables (economic growth and inflation) and bank-specific variables (income diversification, bank capital and bank size), is checked on liquidity creation. Liquidity creation is measured by the BB technique introduced by Berger and Bouwman (2009). The generalized Method of the moment (GMM) is used as a statistical technique to test the causal relationship among the variables of interest. Findings: The outcomes of this study show that among three bank-specific variables two variables; bank capital and size are significantly linked with liquidity creation. Inflation and economic growth are also significantly related to liquidity creation. The relationship between income diversification and liquidity creation is insignificant. Implications: This research will help to propose changes in current banking regulations and economic factors to improve liquidity creation. This research will also help the policymakers and managers of banks in developing policies and making decisions regarding the creation of liquidity. Originality: To the best of the author's knowledge this is the first study that emphasizes the determinants of liquidity creation in the banking sector of Pakistan.

PurposeThis study aims to investigate the factors influencing liquidity creation in banks, particularly focusing on the role of bank governance. Using a unique panel data set, it compares Islamic and conventional banks to discern governance’s impact on liquidity creation, offering insights for policymakers and bank managers.Design/methodology/approachQuantitative analysis is used on a panel data set to assess liquidity creation determinants in banks. A governance index is constructed, analyzing metrics such as risk management, audit committee effectiveness and Shariah board presence. Regression models identify significant relationships between governance factors and liquidity creation.FindingsThis study reveals a positive relationship between governance index and liquidity creation, especially in banks with better performance, higher credit risk, smaller size and lower equity, particularly in low-inflation environments. Specific governance practices significantly impact liquidity creation, alongside a positive relationship with Tier1 ratio, supporting the risk absorption hypothesis.Originality/valueThis research offers empirical evidence on the relationship between bank governance and liquidity creation, highlighting its significance for both Islamic and conventional banks. It provides valuable insights for policymakers and bank managers aiming to enhance banking sector stability and efficiency.

Objective – The highly concentrated ownership structure, lack of quality information, and weak regulatory environments caused imbalances in the movement of cash flows and thereby put the liquidity levels of Gulf Cooperation Council (GCC) banks on a downward trend. This prompted policymakers in the GCC region to modify their Corporate Governance (C.G.) codes to boost the financial position of the GCC banking industry as liquidity providers and minimize systemic risk. Therefore, the purpose of this study is to conceptually investigate the relationship between board governance attributes and liquidity creation in the GCC banking sector. Methodology – The methodology employed in this study is a review of prior research on bank governance mechanisms and liquidity creation to gather perspective and establish a prediction about the association between board attributes and liquidity creation in the GCC banking industry. Findings – The study concludes that there is a positive correlation between the analyzed board governance features and the creation of liquidity based on several theories gleaned from a review of prior research. Novelty – The study evaluates bank liquidity creation and how board attributes influence it. Type of Paper: Review JEL Classification: M41, M49. Keywords: Liquidity Creation, Corporate Governance, Agency Theory, Board Attributes, GCC. Reference to this paper should be made as follows: Mousa, A.K.A; Hassan, N.L; Pirzada, K. (2022). Board Governance Mechanisms and Liquidity Creation: A Theoretical Framework, J. Fin. Bank. Review, 7(2), 122 – 134. https://doi.org/10.35609/jfbr.2022.7.2(3) _______________________________________________________________________________________

Regulators and managers in the banking sector prioritize the banking system’s stability and safety to limit risks, shocks, and potential losses. This study reveals why a bank is more or less stable via bank capital, liquidity creation, and asset diversification. We form a structural model in which bank capital affects stability through liquidity creation, and asset diversification moderates the relationship between liquidity and stability of banks. We employ a moderated mediation model and the Partial Least Squares Structural Equation Modeling (PLS-SEM) with panel data on 27 commercial banks publicly listed in Vietnam from 2014 to 2021. Surprisingly, the empirical results show that raising bank capital reduces liquidity creation while lowering liquidity creation increases bank stability. Thus bank capital has a positive impact on stability via the mediating role of liquidity creation. Moreover, the relationship between liquidity creation and bank stability is moderated by “asset diversification”. Higher asset diversification mitigates the detrimental impact of liquidity creation on bank stability and vice versa. Finally, this study recommends using bank capital, liquidity creation, and asset diversification to bolster bank stability.

Both real and monetary shocks have been extensively researched, with conflicting findings on the involvement of the banking sector following the occurrence of these shocks. Nonetheless, liquidity creation (LC) appears to be one of the most underappreciated banking operations. This research analyses the impact of LC on economic volatility and the mechanisms through which LC influences volatility in 10 MENA countries from 2000 to 2019. Using a recently published panel cointegration estimating approach, we show that LC does influence growth volatility over the long term and short term—in other words, LC, as a primary activity of banks, helps to reduce volatility. According to PMG’s findings, both real and monetary shocks significantly increase volatility in the short term compared to their influence in the long term. The channels of expression show that LC mitigates the influence of real shocks (amplifies the effect of monetary shocks) on growth volatility, and there is a greater magnitude of this effect in the short term. Strengthening the banking industry through LC, which is their primary business, could be a critical strategy in avoiding economic swings.

This study analyses the impact of competition on liquidity creation by banks and investigates the dynamics between diversification, liquidity creation and competition for banks operating in India during the period from 2005 to 2018. Using the broad and narrow measures of liquidity creation, an inverse relationship is determined between liquidity creation and competition. The study also indicates a trade-off between pro-competitive policies to improve consumer welfare and the liquidity-destroying effects of competition, and it highlights how diversification affects liquidity creation. Highly diversified banks in India create less liquidity compared with less-diversified banks, both public and private. The liquidity-destroying effects of competition is intensified among highly diversified private banks, which suggest that diversification has not moderated the adverse impact of competition. JEL Codes: G01, G18, G21, G28

Determinants of Bank Liquidity Creation