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

Document Type : Research Paper

Authors

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

2 Associate Professor of Economics, Faculty of Economics and Management, Urmia University, Urmia, Iran

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

Abstract

The objective of this study is to examine the threshold effect of bank capital on liquidity creation in 59 developing countries and 37 developed countries over the period 2004–2023. To this end, the Panel Smooth Transition Regression (PSTR) model, which is an appropriate approach for analyzing heterogeneous panel data, is employed. The results indicate that the threshold value of the transition variable (i.e., the logarithm of bank capital) is estimated at 3.0034 in the model for developed countries, with a slope parameter of 7.4897. In the model for developing countries, the threshold value is estimated at 2.996, while the slope parameter is 16.5003.
The findings for developed countries reveal that, in the first regime, economic growth and financial stability negatively affect liquidity creation. After crossing the threshold level and entering the second regime, the magnitude of this negative effect decreases, although it remains negative. The results also show that financial inclusion has a positive impact on liquidity creation in the first regime; however, in the second regime, its effect gradually diminishes and becomes negative. In addition, the financial development index has a positive and statistically significant effect on liquidity creation in both regimes.
Furthermore, results for developing countries indicate that economic growth and financial stability negatively affect liquidity creation in both regimes. The findings also demonstrate that financial inclusion positively affects liquidity creation in the first regime, and although its impact gradually declines in the second regime, it remains positive. Moreover, the coefficients of the financial development index are positive and statistically significant in both regimes, indicating a positive contribution to liquidity creation.

Keywords

Main Subjects

References

  1. Ananou, F., Chronopoulos, D. K., Tarazi, A., & Wilson, J. O. (2021). Liquidity regulation and bank lending. Journal of Corporate Finance, 69, 101997.‏
  2. Baele, L., De Jonghe, O., & Vander Vennet, R. (2007). Does the stock market value bank diversification?. Journal of banking & finance, 31(7), 1999-2023.‏
  3. Baradwaj, B. G., Shao, Y., & Dewally, M. (2016). Institutions, capital control, and liquidity creation. Journal of financial economic policy, 8(3), 396-422.‏
  4. Barth, J. R., Caprio Jr, G., & Levine, R. (2004). Bank regulation and supervision: what works best?. Journal of Financial intermediation, 13(2), 205-248.‏
  5. Belkhir, M., Naceur, S. B., Chami, R., & Samet, A. (2021). Bank capital and the cost of equity. Journal of Financial Stability, 53, 100843.‏
  6. Berger, A. N., & Bouwman, C. H. (2009). Bank liquidity creation. The review of financial studies, 22(9), 3779-3837.‏
  7. Berger, A. N., & Bouwman, C. H. (2017). Bank liquidity creation, monetary policy, and financial crises. Journal of Financial Stability, 30, 139-155.‏
  8. Berger, A. N., & Sedunov, J. (2017). Bank liquidity creation and real economic output. Journal of Banking & Finance, 81, 1-19.‏
  9. Berger, A. N., Boubakri, N., Guedhami, O., & Li, X. (2019). Liquidity creation performance and financial stability consequences of Islamic banking: Evidence from a multinational study. Journal of Financial Stability, 44, 100692.‏
  10. Bhattacharya, S., & Thakor, A. V. (1993). Contemporary banking theory. Journal of financial Intermediation, 3(1), 2-50.‏
  11. Boot, A. W., Greenbaum, S. I., & Thakor, A. V. (1993). Reputation and discretion in financial contracting. The American economic review, 1165-1183.‏
  12. Brei, M., Gambacorta, L., & Von Peter, G. (2013). Rescue packages and bank lending. Journal of Banking & Finance, 37(2), 490-505.‏
  13. Bryant, J. (1980). A model of reserves, bank runs, and deposit insurance. Journal of banking & finance, 4(4), 335-344.‏
  14. Calem, P., & Rob, R. (1999). The impact of capital-based regulation on bank risk-taking. Journal of Financial Intermediation, 8(4), 317-352.‏
  15. Casu, B., Di Pietro, F., & Trujillo-Ponce, A. (2019). Liquidity creation and bank capital. Journal of Financial Services Research, 56(3), 307-340.‏
  16. Chen, T. H., Shen, C. H., Wu, M. W., & Huang, K. J. (2021). Effect of shadow banking on the relation between capital and liquidity creation. International Review of Economics & Finance, 76, 166-184.‏
  17. Dagher, J., Dell'Ariccia, M. G., Laeven, M. L., Ratnovski, M. L., & Tong, M. H. (2016). Benefits and costs of bank capital. International Monetary Fund.‏
  18. De Vos, I. & Westerlund, J. (2019). On CCE estimation of factor-augmented models when regressors are not linear in the factors. Economics Letters, 178, 5–7.
  19. Demirguc‐Kunt, A., Detragiache, E., & Merrouche, O. (2013). Bank capital: Lessons from the financial crisis. Journal of money, credit and Banking, 45(6), 1147-1164.‏
  20. Demirgüç-Kunt, A., Detragiache, E., (2011). Basel core principles and bank soundness: Does compliance matter?, Journal of Financial Stability 7(4), 179-190.
  21. Diamond, D. W., & Rajan, R. G. (2001). Liquidity risk, liquidity creation, and financial fragility: A theory of banking. Journal of political Economy, 109(2), 287-327.‏
  22. Distinguin, I., Roulet, C., & Tarazi, A. (2013). Bank regulatory capital and liquidity: Evidence from US and European publicly traded banks. Journal of Banking & Finance, 37(9), 3295-3317.‏
  23. Evans, J. J., & Haq, M. (2022). Does bank capital reduce liquidity creation?. Global Finance Journal, 54, 100640.‏
  24. Fidrmuc, J., Fungáčová, Z., & Weill, L. (2015). Does bank liquidity creation contribute to economic growth? Evidence from Russia. Open Economies Review, 26, 479-496.‏
  25. Fu, X., Lin, Y., & Molyneux, P. (2016). Bank capital and liquidity creation in Asia Pacific. Economic Inquiry, 54(2), 966-993.‏
  26. Fu, X., Lin, Y., & Molyneux, P. (2018). The quality and quantity of bank intermediation and economic growth: evidence from Asia Pacific. Applied Economics, 50(41), 4427-4446.‏
  27. Fungacova, Z., Turk, R., & Weill, L. (2021). High liquidity creation and bank failures. Journal of Financial Stability, 57, 100937.‏
  28. Fungáčová, Z., Weill, L., & Zhou, M. (2017). Bank capital, liquidity creation and deposit insurance. Journal of Financial Services Research, 51, 97-123.‏
  29. Gonzalez, A., Ter€asvirta, T., van Dijk, D. & Yang, Y. (2017). Panel smooth transition regression models. SSE/EFI Working Paper Series in Economics and Finance 604, Stockholm School of Economics.
  30. Gonzalez, A., Terasvirta, T. & Van Dijk, D. (2005). Panel Smooth Transition Regression Models. SEE/EFI Working paper Series in Economics and Finance (604), 1-33.
  31. Gorton, G., & Winton, A. (2017). Liquidity provision, bank capital, and the macroeconomy. Journal of Money, Credit and Banking, 49(1), 5-37.‏
  32. Gupta, J., & Kashiramka, S. (2020). Financial stability of banks in India: does liquidity creation matter?. Pacific-Basin Finance Journal, 64, 101439.‏
  33. Gupta, J., Kashiramka, S., Ly, K. C., & Pham, H. (2023). The interrelationship between bank capital and liquidity creation: A non-linear perspective from the Asia-Pacific region. International Review of Economics & Finance, 85, 793-820.‏
  34. Hansen, B.E. (1999). Threshold effects in non-dynamic panels: estimation, testing, and inference. Journal of Econometrics. 93, 345–368.
  35. Haselmann, R., Wachtel, P., (2006). Institutions and bank behaviour. Working Paper No. EC06-16, New York University, Stern School of Business.
  36. Horváth, R., Seidler, J., & Weill, L. (2014). Bank capital and liquidity creation: Granger-causality evidence. Journal of Financial Services Research, 45, 341-361.‏
  37. Hsieh, M. F., Lee, C. C., & Lin, Y. C. (2022). New evidence on liquidity creation and bank capital: The roles of liquidity and political risk. Economic Analysis and Policy, 73, 778-794.‏
  38. Jude, E. 2010. Financial Development and Growth: A Panel Smooth Regression Approach. Journal of Economic Development, (35): 53-74.
  39. Kashyap, A. K., Rajan, R., & Stein, J. C. (2002). Banks as liquidity providers: An explanation for the coexistence of lending and deposit‐taking. The Journal of finance, 57(1), 33-73.‏
  40. Kim, D., & Sohn, W. (2017). The effect of bank capital on lending: Does liquidity matter?. Journal of Banking & Finance, 77, 95-107.‏
  41. Kirimi, P. N., Kariuki, S. N., & Ocharo, K. N. (2022). Moderating effect of bank size on the relationship between financial soundness and financial performance. African Journal of Economic and Management Studies, 13(1), 62-75.‏
  42. Kishan, R. P., & Opiela, T. P. (2000). Bank size, bank capital, and the bank lending channel. Journal of Money, credit and banking, 121-141.‏
  43. Le, T. (2019). The interrelationship between liquidity creation and bank capital in Vietnamese banking. Managerial Finance, 45(2), 331-347.‏
  44. Le, T. D., & Pham, X. T. (2021). The inter-relationships among liquidity creation, bank capital and credit risk: evidence from emerging Asia–Pacific economies. Managerial Finance, 47(8), 1149-1167.‏
  45. Levine, R., & Zervos, S. (1998). Stock markets, banks, and economic growth. American economic review, 537-558.‏
  46. Mehran, H., & Thakor, A. (2011). Bank capital and value in the cross-section. The Review of Financial Studies, 24(4), 1019-1067.‏
  47. Miles, D., Yang, J., & Marcheggiano, G. (2013). Optimal bank capital. The Economic Journal, 123(567), 1-37.‏
  48. Mohanty, S., & Mahakud, J. (2021). Causal nexus between liquidity creation and bank capital ratio: Evidence from India. Margin: The Journal of Applied Economic Research, 15(2), 205-237.‏
  49. Naceur, S. B., & Kandil, M. (2009). The impact of capital requirements on banks’ cost of intermediation and performance: The case of Egypt. Journal of Economics and Business, 61(1), 70-89.‏
  50. Nguyen, T. V. H., Ahmed, S., Chevapatrakul, T., & Onali, E. (2020). Do stress tests affect bank liquidity creation?. Journal of Corporate Finance, 64, 101622.‏
  51. North, D. C. (1990). Institutions, institutional change and economic performance (Vol. 4). Cambridge university press.‏
  52. Rezazadeh Karsalari, F., & Sargolzaei, M. (2019). The effect of bank performance on liquidity creation in the banking system. Financial Accounting Empirical Studies, 16 (64), 113-133 (In Persian).
  53. Rubbaniy, G., Khalid, A. A., Ali, S., & Polyzos, E. (2023). Cyclicality of liquidity creation: Nonlinear evidence from US bank holding companies. Journal of Financial Research, 46(4), 1165-1185.‏
  54. Shahchera, M., & Zaheri, M. (2015). The effect of bank capital structure on the role of banks in creating liquidity in the Iranian economy. Monetary and Banking Research, 8 (23), 81-59 (In Persian).
  55. Sholeh, M., & Zamanzadeh, H. (2013). The role of capital adequacy requirements in bank money creation in Iran. Quarterly Journal of Financial and Economic Policies, 11 (41), 195-165 (In Persian).
  56. Song, F., & Thakor, A. V. (2022). Bank Capital, Loan Trading and Funding Liquidity Creation. Olin Business School Center for Finance & Accounting Research Paper, (2022/03).‏‏
  57. Thakor, A., & Edison, G. Y. (2024). Funding liquidity creation by banks. Journal of Financial Stability, 73, 101295.‏
  58. Von Thadden, E. L. (2004). Bank capital adequacy regulation under the new Basel Accord. Journal of Financial Intermediation, 13(2), 90-95.‏
  59. Wang, H., Zhao, X., Zhang, Z., Li, S. & Yuan, J. (2019). Material flows embodied in China–Japan trade. In: Advances in Intelligent Systems and Computing. Springer Verlag, pp. 338–344.
  60. Wegner, D. L. B. (2020). Liquidity policies and financial fragility. International Review of Economics & Finance, 70, 135-153.‏
  61. Williams, B. (2013). Income volatility of Indonesian banks after the Asian financial crisis. Journal of the Asia Pacific Economy, 18(2), 333-358.‏

Files

Share

How to cite

Statistics