The Threshold Effect of Bank Capital on Liquidity Creation in Selected Developing and Developed Countries

Articles in Press

Document Type : Research Paper

Authors

1 Ph.D. Student in Financial Economics, Faculty of Economics and Management, Urmia University, Urmia, Iran

2 Associate Prof. of Economics, Faculty of Economics and Management, Urmia University, Urmia, Iran

3 Associate Prof. of Financial and Insurance, Faculty of Economics and Management, Urmia University, Urmia, Iran

10.22034/ecoj.2026.67209.3425

Abstract

The aim of this study is to investigate the Threshold effect of bank capital on liquidity creation in 59 developing countries and 37 developed countries in two separate models over the period 2004-2023. For this purpose, the panel smooth transition regression (PSTR) model, which is very suitable for heterogeneous panel data, has been used. The results show that there is a nonlinear relationship between the variables under study and the threshold value of the transmission variable (i.e., the logarithm of the bank's regulatory capital) in the developed countries model is estimated to be 3.0034 and the slope parameter is 7.4897, and in the developing countries model the threshold value of the transmission variable is estimated to be 2.996 and the slope parameter is 16.5003.

The results in developed countries indicate that in the first regime, economic growth and financial stability have a negative effect on liquidity creation, which decreases after crossing the threshold location in the second regime but is still negative. The results also indicate that financial inclusion has a positive effect on liquidity creation in the first regime, but its effect gradually decreases and becomes negative in the second regime.

In addition, the results for developing countries show that economic growth and financial stability have a negative impact on liquidity creation in both regimes. The results also indicate that financial inclusion in the first regime has a positive effect on liquidity creation, and in the second regime, its effect gradually decreases, but is still positive.

Keywords

Main Subjects

Applied Theories of Economics

Articles in Press, Accepted Manuscript
Available Online from 04 January 2026

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