Abstract
We examine the effect of regulatory capital and ownership structure on banks’ liquidity creation in emerging Asian economies. We find a positive association between regulatory capital and bank liquidity creation, which is consistent with the risk-absorption hypothesis. Bank size has a positive relation with liquidity creation, implying that large banks have more capacity to create liquidity as they enjoy more of the safety net provided by lenders of last resort in the event of crisis, the advantage of reputational benefit, and easier access to external market funding. The negative effect of the bank funding structure is that, as the subordinate debt is typically uninsured, higher funding costs lead banks to reduce liquidity creation. The results imply that an increase in interest rates worsens liquidity creation. For ownership structure, the results show the significance of the impact of ownership concentration on liquidity creation. Banking institutions having higher equity and higher concentration ownership leads to improved liquidity creation.
Highlights
The subprime crisis of 2007 led to capital and liquidity shortfall in the banking system worldwide and became a huge risk to the global financial system
We examine how liquidity changes with changes in regulatory capital under various ownership structures, to explore which ownership structures are more effective in preserving bank liquidity creation
The results show that regulatory capital is positively related to the inverse of the net-stable-funding ratio (NSFR), which implies that high capital ratios lead to improved liquidity creation consistent with the riskabsorption hypothesis as more capital enhances the bank’s risk-taking ability
Summary
The subprime crisis of 2007 led to capital and liquidity shortfall in the banking system worldwide and became a huge risk to the global financial system. Basel III improves the requisite capital level with respect to riskweighted assets, the financial repercussions of this change are still not clear. Banks can improve their capital ratios, either by growing their capital levels or reducing their risk-weighted investments. Banks create liquidity through financing long-run illiquid assets (i.e., loans) by short-run liquid obligations (i.e., deposits). They generate off balance sheet liquidity through loan commitments and similar
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
