This article analyses the combined impact of increased geopolitical risk and inflationary macroeconomic dynamics on the financial stability of the euro area banking sector. The analysis complements the theoretical and regulatory framework with recent quantitative data provided by the European Central Bank (ECB), the European Banking Authority (EBA) , the International Monetary Fund (IMF), UNCTAD, and the Financial Stability Board (FSB). On the macroeconomic front, the euro area experienced a significant inflationary shock: the Harmonized Index of Consumer Prices (HICP) peaked at 10.6% year-on-year in October 2022, before gradually declining in 2023–2024, driven by the ECB's monetary policy normalization and the easing of the energy shock. At the same time, pressure on global public debt increased, from approximately $97 trillion in 2023 to $ 102 trillion in 2024, with the global debt-to-GDP ratio estimated at 94% in 2023 and projected to be on an expansionary path, particularly in advanced economies. Despite this scenario of high uncertainty, credit institutions in the European Union and the European Economic Area (EU/EEA) maintain a robust prudential stance: the average fully-loaded Common Equity Tier 1 (CET1) ratio reached 15.9% in the fourth quarter of 2023 (Source: EBA), while the Non- Performing The overall loan (NPL) ratio stabilized at around 1.9% , with liquidity ratios (such as the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) ) well above the regulatory minimums. The article, however, highlights the crucial role of the non-banking sector: exposures to Non-Banking Financial Intermediaries (NBFIs) constitute 9.2% of EU/EEA banks' assets, while funding received from NBFIs represents 10.3% of liabilities, highlighting significant systemic interconnections. Based on these findings, three qualitative scenarios are developed for the 2025–2030 horizon: (A) Geopolitical Escalation and Stagflation, (B) Soft Landing in a Context of High Public Debt, and (C) Financial Fragmentation with Stress in the Non-Banking Sector. For each scenario, the transmission channels are analysed, discussing the implications for micro-prudential risk management and the design of macro-prudential instruments. The findings suggest that system resilience is no longer simply a function of capital and liquidity availability but requires a systematic integration of geopolitical and macroeconomic variables into governance processes and strengthened coordination between monetary, fiscal, and macro-prudential policies.

Net stable funding ratio: Implication for Bank stability in Europe

This study aims to analyze the effect of the Net Stable Funding Ratio on the financial performance of banks listed on the Indonesia Stock Exchange in the 2018–2023 period. Financial performance is measured using two main indicators, namely Return on Assets and Return on Equity. The Net Stable Funding Ratio is one of the liquidity ratios applied under Basel III to improve the stability of long-term banking funding. This study uses a quantitative method with a simple linear regression approach to test the effect of the Net Stable Funding Ratio on bank profitability (Return on Assets and Return on Equity). The results showed that the Net Stable Funding Ratio has no significant effect on ROA or ROE of the sample banks. The low R-squared value in both models indicates that the independent variable (NSFR) explains only a small part of the variation in the dependent variables (ROA and ROE), so other factors may be more influential in determining the company's profitability. The results are expected to provide insights for investors, regulators, and policymakers in understanding the relationship between funding stability and bank profitability, as well as serve as a reference in designing a more sustainable and competitive banking strategy in the financial market.

Default risk is a major concern for banks and is shaped by both internal and external factors. Regulatory frameworks like Basel III aim to mitigate such risks. This study investigates the impact of Basel III standards on the default risk of Islamic banks in Bangladesh, focusing on three key indicators: Capital Adequacy Ratio (CAR), Liquidity Coverage Ratio (LCR), and Net Stable Funding Ratio (NSFR). The research covers all Islamic banks in Bangladesh and utilizes secondary data from annual reports. Default risk is assessed using the z-score, where a higher score indicates a lower probability of insolvency. Control variables include credit risk, investment propensity, off-balance sheet exposure, economic growth, and lending rates. A Random Effects Model is employed, with Panel-Corrected Standard Errors (PCSE) applied to address heteroskedasticity, autocorrelation, and cross-sectional dependency. Findings reveal that CAR, LCR, and NSFR significantly reduce default risk, highlighting the effectiveness of Basel III measures in strengthening financial stability. This study uniquely emphasizes Islamic banks and explores the alignment between globally recognized regulatory standards and Sharia-compliant banking. The results offer valuable insights for regulators, policymakers, and bank managers striving to balance regulatory compliance with the principles of Islamic finance.

This study aims to measure the causal relationship between Net Stable Funding, represented by its indicators (Net Stable Funding Ratio, Loans to Total Deposits Ratio, and Cash to Total Deposits Ratio) as explanatory variables, and Bank Investment, represented by its indicators (Bank Investment to Total Deposits Ratio, and Bank Investment to Total Assets Ratio) as dependent variables. The research investigates the direction of this relationship using the Granger Causality test for short-term data and the Toda-Yamamoto causality approach for long-term data. Additionally, the correlation between the research variables is measured using the statistical software EViews 10 The study population consists of Iraqi private commercial banks. A sample of ten private banks listed on the Iraq Stock Exchange was selected due to their financial contribution to the development of the Iraqi banking sector. The research hypothesis was tested using a descriptive-analytical method based on the banks' annual reports for the period from 2017 to 2020.

This paper examines the impact of liquidity reforms on financial system stability in Nigeria in the aftermath of the 2007/2008 global financial crisis. The crisis exposed significant vulnerabilities within the global financial system, prompting regulatory bodies to adopt measures including the introduction of the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) to strengthen the resilience of financial institutions and mitigate systemic risks. Using a Regression Discontinuity Design (RDD), the study analyzes panel data from 14 banks operating in Nigeria over the period 2010 to 2021. The results indicate that both LCR and NSFR significantly and positively influence financial system stability. Specifically, higher compliance with the LCR is associated with improved short-term liquidity risk management, while adherence to the NSFR contributes to greater long-term financial resilience. These findings suggest that the reforms have not only enhanced individual bank solvency but also mitigated systemic risks by reducing the likelihood of liquidity-induced disruptions. The paper contributes to the growing body of literature on post-crisis regulatory reforms by providing empirical evidence from Nigeria, emphasizing the relevance of global liquidity standards in safeguarding financial systems in developing markets. It underscores the need for sustained regulatory oversight and compliance with international liquidity standards to maintain stability and foster trust in the banking sector. The findings have important implications for policymakers and financial regulators. They emphasize the need for continued enforcement of liquidity requirements and suggest that further refinements to the regulatory framework could yield additional stability benefits. This study demonstrates that liquidity reforms, specifically the implementation of LCR and NSFR, have been instrumental in strengthening financial system stability in Nigeria.

This paper examines the impact of Basel III liquidity requirements, specifically the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR), on the profitability of banks in Nigeria, using regression discontinuity design (RDD) to analyze data from 14 banks over the period from 2009 to 2020. The study provides empirical insights into how these regulations influence bank performance, focusing on return on assets (ROA) and return on equity (ROE). The results reveal that the LCR has a significant positive impact on ROA, indicating that holding adequate high-quality liquid assets improves asset efficiency. However, its effect on ROE is insignificant, suggesting that enhanced liquidity does not necessarily translate into higher returns for shareholders. Similarly, the NSFR shows a significant positive impact on ROA but an insignificant effect on ROE, highlighting the benefits of long-term funding stability for asset profitability without significantly boosting shareholder returns. These findings suggest that while Basel III liquidity requirements contribute to enhancing bank stability and operational performance, they may not immediately result in higher equity returns in the Nigerian context. The study recommends that banks optimize their capital allocation and liquidity management strategies to achieve a balance between regulatory compliance and shareholder value. Additionally, regulators, particularly the Central Bank of Nigeria (CBN), should periodically review liquidity requirements to reflect the unique challenges of the Nigerian banking environment. This study contributes to the existing literature by providing empirical evidence on the impact of Basel III liquidity requirements on bank profitability in the Nigerian context. The use of Regression Discontinuity Design offers a robust approach to identifying causal effects, enriching the understanding of how liquidity management practices affect financial performance, particularly in emerging markets where liquidity risks are more pronounced.

This research aims to analyze the differences in operational and liquidity risks of Islamic banks in the ASEAN region based on the Basel III framework. The study employs a quantitative methodology, utilizing the Kruskal-Wallis analysis and Mann-Whitney U test, drawing on financial reports from Islamic banks from 2021 to 2023. Key indicators examined include the Operational Risk Capital Charge (ORCC), Net Stable Funding Ratio (NSFR), and Liquidity Coverage Ratio (LCR). The findings reveal significant differences in the management of operational risk (ORCC) and long-term funding stability (NSFR), while no significant differences were observed in short-term liquidity (LCR). It was noted that predominantly Muslim countries are better equipped to handle operational risks, whereas banks in smaller markets face liquidity challenges. However, the study is limited to Islamic banks in five ASEAN countries and does not consider external variables such as macroeconomic conditions. Overall, these findings contribute to the existing literature on risk management in Islamic banks within the ASEAN region and offer valuable insights for regulators to develop policies tailored to local characteristics.

PurposeConsidering the influence of the bank’s business model, this study aims to explore the drivers of liquidity risk in the dual banking sector of the Gulf Cooperation Council (GCC) using the two new liquidity requirements of Basel III, Net Stable Funding Ratio and Liquidity Coverage Ratio, as indicators of liquidity risk.Design/methodology/approachFor 61 GCC banks between 2018 and 2022, this study applies the random effects model with an interaction dummy variable technique.FindingsIslamic banks in the GCC region tend to have a significantly lower level of Basel III liquidity requirements, meaning that they are struggling to meet the new Basel III liquidity requirements as they lack an adequate liquidity risk management framework. The liquidity of GCC banks decreases with size; this relationship is linear for conventional GCC banks but not linear for Islamic banks. Finally, the COVID-19 epidemic has exacerbated liquidity risk for GCC banks, with Islamic banks appearing to be the most impacted. The findings are robust to alternative variable selections and estimation techniques.Practical implicationsThe findings provide useful insights to improve liquidity risk management practices in the GCC banking system, especially for Islamic banks. Targeted reforms may be needed to further develop Islamic banks’ liquidity tools and optimize their ability to withstand macroeconomic and systemic shocks.Originality/valueTo the best of the author’s knowledge, no single study considers the new Basel III metrics for bank liquidity or explicitly compares a wide range of liquidity factors for conventional and Islamic banks in the GCC region.

Commercial bank NSFR adjustment and risk: Evidence from China

Abstract We study the response of banks to the removal of a limit on maturity transformation, similar to the Net Stable Funding Ratio. We formalize the testable hypotheses using a simple banking model where the profitability function depends on the level of maturity transformation and the risk profile. We show that after the regulatory change, banks rebalanced the composition of their assets and liabilities. They increased their exposure to interest rate risk, while we find no effect on credit risk. Our evidence supports the common theoretical view that banks have an incentive to engage in maturity transformation and that this implies higher interest rate risk exposure. We also show that bank profitability is not affected. However, banks take advantage of the greater flexibility provided by deregulation to engage in some cross-selling associated with the increased supply of mortgages, which is consistent with the theory emphasizing the importance of increasing market power.

This study analyzes liquidity and capitalization based on the Financial Services Authority Regulation (POJK). Liquidity is measured by LCR and NSFR based on POJK Number 42/POJK.03/2015 concerning the obligation to fulfill the Liquidity Coverage Ratio (LCR) for Commercial Banks and POJK Number 50/POJK.03/2017 concerning the obligation to fulfill the Net Stable Funding Ratio (NSFR) for Commercial Banks. Capitalization is measured using the KPMM ratio according to the risk profile based on POJK Number 11/POJK.03/2016 concerning the obligation to provide minimum capital for Commercial Banks. The samples used in this study were state-owned banks listed on the Indonesia Stock Exchange, namely PT Bank Rakyat Indonesia Tbk (BBRI), PT Bank Mandiri Tbk (BMRI), PT Bank Negara Indonesia Tbk (BBNI), and PT Bank Tabungan Negara Tbk (BBTN). The data used are secondary data in the form of Bank annual reports, LCR calculation reports, and NSFR Reports for the 2019 to 2023 Period of each Bank. The four state-owned banks have LCRs of more than 100%. This indicates that the banks have highly liquid assets that are sufficient to handle a liquidity stress scenario within a 30-day period. The four state-owned banks have NSFRs of more than 100%. This indicates that the institutions have sufficient stable funding to meet funding needs for the next 12 months. The four state-owned banks have CARs that exceed the CAR limit based on the risk profile rating of each bank. The higher the CAR, the better the bank's ability to meet its financial obligations when under pressure

Interbank Decisions and Margins of Stability: an Agent-Based Stock-Flow Consistent Approach

Basel III imposed restrictive measures on liquidity, targeting both Islamic and conventional banks equally, to strengthen the resilience of the banking industry in the aftermath of the 2008 financial crisis. This study examines the impact of Basel III liquidity regulatory variables, net stable funding ratio (NSFR), and liquidity coverage ratio (LCR) on the profitability of all four full-fledged Islamic banks in Pakistan from 2007 to 2021. Results reveal no short-term impact and a significant long-term impact of liquidity regulations on the profitability of banks by using the panel autoregressive distributed lag model. Specifically, the LCR is found to have a significant positive impact, and NSFR has a significant negative impact on the profitability of Islamic banks in Pakistan. The significance of sustained profitability planning is highlighted by the long-term effects of NSFR and LCR on profitability. Managers of banks should concentrate on tactics that strike a balance between liquidity requirements and the objective of maintaining or enhancing long-term profitability.

Using machine learning for detecting liquidity risk in banks

The interactive impact of green supporting factors on bank credit creation: An agent-based stock-flow consistent approach

Purpose: The objective of this study was to determine the effect of liquidity coverage ratio, net stable funding ratio, net interest margin, and cost of funds on return on assets in Southeast Asian countries' banking services. Methodology/approach: This research was a quantitative research method. Secondary data was used and collected from stock exchanges in each country. Samples were banks in Indonesia, Malaysia, Cambodia, Philippines, Singapore and Thailand. The data testing technique uses multiple linear regression analysis. Findings: The study inform that net stable funding ratio, liquidity coverage ratio, net interest margin and cost of funds have a significant effect on return on assets. Practical implications: The practical implications were BASEL III implementation to manage liquidity risk and capital in each country have successfully and encourage compliance with bank liquidity and capital aspects according to the framework of BASEL III to enhance the financial performance of banks in Southeast Asian countries. Originality/value: Research on the application of BASEL III in Southeast Asian Countries as a framework that establishes international standards for bank capital adequacy, stress testing, and liquidity requirements is the originality of this research.

As liquidity risk is affecting the banking industry of Bangladesh, the study aims to analyze the impact of liquidity risk on financial performance of selected commercial banks in Bangladesh. The study applied a descriptive research design and targeted 20 commercial banks in Bangladesh, with secondary data collected over the span of five years from 2014 to 2018 and analyzed by employing the panel regression analysis model. Nine factors affecting financial performance of selected commercial banks in Bangladesh were selected and investigated. In the study, Return on Asset (ROA) and Return on Equity (ROE) are used as bank performance measurement tools and Non-Performing Loan ratio (NPLR), Capital Adequacy ratio (CAR), Capital to Total Asset ratio (CTAR), Loan to Deposit ratio (LTD), Loan to Total Asset ratio (LTA), Deposit to Asset ratio (DTA), Cash to Deposit ratio (CDR), Liquidity Coverage ratio (LCR), and Net Stable Funding ratio (NSFR) are used as liquidity risk indicators. The result of panel data regression analysis showed that NPLR, CAR, LTD, and DTA had negative and statistically significant impact whereas, LTA, CTAR, and LCR had positive and statistically significant impact on the financial performance of selected commercial banks in Bangladesh. However, CDR and NSFR had no statistically significant impact on financial performance of the chosen banks for the sample period. Therefore, it has been identified that the liquidity risk is negatively affecting the financial performance of the selected commercial banks in Bangladesh.

Abstract We examine the impact of Basel III's liquidity requirements, such as the liquidity coverage ratio (LCR), net stable funding ratio (NSFR), and capital adequacy, on bank lending and financial stability using data from 688 commercial banks of 10 developing economies from 2014 to 2021 using fixed effects panel estimation. The findings of the study support that bank lending is positively impacted by the regulatory capital and the short‐term liquidity requirement (LCR), but negatively impacted by the NSFR. We find that the bank's Z‐score benefits from achieving the required capital and liquidity requirements. Lending growth and bank stability are nonlinearly impacted by regulations governing bank capital and liquidity. Furthermore, we use the Generalized Methods of Moments‐Quantile Regression (GMM‐QR). Finally, our results indicate that regulators in these developing countries should support adequate capital and liquidity management to lessen adverse economic shocks' impact on banks' intermediation capabilities and stability.

Basel III modified the requirements for approving new regulatory capital norms to improve capital quality. Because bank liquidity problems were a defining feature of the crisis, Basel III established new requirement ratios while also tightened capital requirements. The Liquidity Coverage Ratio (LCR) was developed to safeguard banks' short-term liquidity, whereas the Net Stable Funding Ratio (NSFR) is being proposed to strengthen banks' medium- and long-term liquidity shock resilience. As a necessary consequence, Islamic financial institutions (IFIs) must issue instruments that satisfy both Basel III and Shari’ah requirements. This study aims to identify the regulatory requirements for Basel III and the Islamic Financial Services Board (IFSB)'s new capital and liquidity rules, as well as the implications for Islamic banks (IB). This study employs a mixed research methodologies approach which includes document analysis of primary and secondary sources, as well as the relevant regulations published by BCBS and IFSB. This study relies on the identification of Standards for each criterion before conducting a systematic review of the 23 publications that meet the study's requirements published between 2013 and 2022. There is a scarcity of Shari’ah-compliant research on capital buffers, tier 1 capital, and common equity tier 1 capital, according to certain findings. Furthermore, the empirical literature suggests that Basel III has a significant impact on the financial risk of the IB sector in the samples collected. However, there is still a significant gap in studies investigating the influence of Basel III/IFSB capital and liquidity regulations on Islamic bank risk, or more precisely, supportive data from empirical investigations. The wealth of research will provide new insights to standard-setters (BCBS and IFSB), regulators, researchers, and academicians.