FACTORS SHAPING LIQUIDITY DYNAMICS IN THE BANKING SECTOR OF PAKISTAN
DOI:
https://doi.org/10.37435/nbr.v6i2.90Keywords:
Liquidity Creation, Economic Growth, Inflation, Income Diversification, Bank Size, Bank Capital, GMMAbstract
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.
References
Adaramola, A. O., & Dada, O. (2020). Impact of inflation on economic growth: evidence from Nigeria. Investment Management and Financial Innovations, 17(2), 1-13. DOI: https://doi.org/10.21511/imfi.17(2).2020.01
Alhassan, L, A (2015) "Income diversification and bank efficiency in an emerging market", Managerial Finance, 41(12), 1318-1335. DOI: https://doi.org/10.1108/MF-12-2014-0304
Ali, M., & Puah, C. H. (2018). Does bank size and funding risk affect banks’ stability? A lesson from Pakistan. Global Business Review, 19(5), 1166-1186. DOI: https://doi.org/10.1177/0972150918788745
Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29-51. DOI: https://doi.org/10.1016/0304-4076(94)01642-D
Baradwaj, B. G., Shao, Y., & Dewally, M. (2016). Institutions, capital control, and liquidity creation.Journal of financial economic policy, 8(3), 396-422. DOI: https://doi.org/10.1108/JFEP-11-2015-0073
Bawuah, I. (2024). Bank capital and liquidity creation in Sub-Saharan Africa: the role of quality institutions. African Journal of Economic and Management Studies, (ahead-of-print). DOI: https://doi.org/10.1108/AJEMS-01-2023-0036
Berger, A. N., & Bouwman, C. H. (2009). Bank liquidity creation. The review of financial studies, 22(9), 3779-3837 DOI: https://doi.org/10.1093/rfs/hhn104
Berger, A. N., & Bouwman, C. H. (2017). Bank liquidity creation, monetary policy, and financial crises. Journal of Financial Stability, 30, 139-155. DOI: https://doi.org/10.1016/j.jfs.2017.05.001
Berger, A. N., & Sedunov, J. (2017). Bank liquidity creation and real economic output. Journal of Banking & Finance, 81, 1-19. DOI: https://doi.org/10.1016/j.jbankfin.2017.04.005
Berger, A. N., Hasan, I., & Zhou, M. (2010). The effects of focus versus diversification on bank performance: Evidence from Chinese banks. Journal of Banking & Finance, 34(7), 1417-1435 DOI: https://doi.org/10.1016/j.jbankfin.2010.01.010
Bhattacharya, S. And Thakor, A.V. (1993), “Contemporary banking theory”, Journal of Financial Intermediation, 3(1), 2-50. DOI: https://doi.org/10.1006/jfin.1993.1001
Bikker,J & Vervliet, T (2017). Bank profitability and risk-taking under low interest rates. Journal of Banking & Finance. 41(3). DOI: https://doi.org/10.2139/ssrn.3002480
Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic pane data models. Journal of Econometrics, 87(1), 115-143. DOI: https://doi.org/10.1016/S0304-4076(98)00009-8
Casu, B., Di Pietro, F., & Trujillo-Ponce, A. (2019). Liquidity creation and bank capital. Journal of Financial Services Research, 56(3), 307-340. DOI: https://doi.org/10.1007/s10693-018-0304-y
Chen, Y &Lai, P. (2017) Does diversification promote risk reduction and profitability rise? Estimation of dynamic impacts using the pooled mean group model, Journal of Applied Statistics, 44(10), 1893-1901, DOI: https://doi.org/10.1080/02664763.2016.1252729
Dang, V. D. (2021). How do bank characteristics affect the bank liquidity creation channel of monetary policy? Finance Research Letters, 101984. DOI: https://doi.org/10.1016/j.frl.2021.101984
Davydov, D., Fungáčová, Z., & Weill, L. (2018). Cyclicality of bank liquidity creation. Journal of International Financial Markets, Institutions and Money, 55, 81-93. DOI: https://doi.org/10.1016/j.intfin.2018.02.014
Diamond, D. W., & Rajan, R. G. (2000). A theory of bank capital. The Journal of Finance, 55(6), 2431-2465. DOI: https://doi.org/10.1111/0022-1082.00296
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. DOI: https://doi.org/10.1086/319552
Díaz, V., & Huang, Y. (2017). The role of governance on bank liquidity creation. Journal of Banking & Finance, 77, 137-156. DOI: https://doi.org/10.1016/j.jbankfin.2017.01.003
Elizalde, A., & Repullo, R. (2007). Economic and regulatory capital in banking: what is the difference? International Journal of Central Banking, 3(3),87-116.
Fidrmuc, J., Fungáčová, Z. And Weill, L. (2015). Does bank liquidity creation contribute to economic growth? Evidence from Russia. Open Economies Review, 26(3),479-496. DOI: https://doi.org/10.1007/s11079-015-9352-1
Fang, Y., Wang, Q., Wang, F., & Zhao, Y. (2023). Bank fintech, liquidity creation, and risk-taking: Evidence from China. Economic Modelling, 127, 106445. DOI: https://doi.org/10.1016/j.econmod.2023.106445
Fungacova, Z., Turk, R., & Weill, L. (2021). High liquidity creation and bank failures. Journal of Financial Stability, 57, 100937. DOI: https://doi.org/10.1016/j.jfs.2021.100937
Fu, X., Lin, Y., & Molyneux, P. (2016). Bank capital and liquidity creation in the Asia Pacific. Economic Inquiry, 54(2), 966-993 DOI: https://doi.org/10.1111/ecin.12308
Fungáčová, Z., Turk, R., Weill, L., (2015). High liquidity creation and bank failures. In: International Monetary Fund Working Paper No. 15/103, DOI: https://doi.org/10.5089/9781475581805.001
Gyeke-Dako, A., Nabieu, G. A. A., Kriese, M., & Kusi, B. A. (2021). Political business cycle and bank liquidity creation in Ghana: the role of financial sector transparency. Macroeconomics and Finance in Emerging Market Economies, 1-19. DOI: https://doi.org/10.1080/17520843.2021.1975792
Hackethal, A,Rauch, C., Steffen, S., & Tyrell, M. (2010). Determinants of bank liquidity creation. Available at SSRN 1343595.
Horváth, R., Seidler, J., & Weill, L. (2014). Bank capital and liquidity creation: Granger causality evidence. Journal of Financial Services Research, 45(3), 341-361. DOI: https://doi.org/10.1007/s10693-013-0164-4
Hou, X., Li, S., Li, W., & Wang, Q. (2018). Bank diversification and liquidity creation: Panel Granger-causality evidence from China. Economic Modelling, 71, 87-98 DOI: https://doi.org/10.1016/j.econmod.2017.12.004
Huynh, J. (2024). What drives bank liquidity creation? The interaction of monetary policy and strategic scope. Heliyon, 10(2), e24131-e24131. DOI: https://doi.org/10.1016/j.heliyon.2024.e24131
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. DOI: https://doi.org/10.1111/1540-6261.00415
Khan, M., & Hanif, W. (2020). Institutional quality and the relationship between inflation and economic growth. Empirical Economics, 58(2), 627-649. DOI: https://doi.org/10.1007/s00181-018-1479-7
Kinini, D. M., Ocharo, K. N., & Kariuki, P. W. O. (2023). Do income diversification and capital adequacy affect liquidity creation? A case study of commercial banks in Kenya. Cogent Business & Management, 10(2), 2240082. DOI: https://doi.org/10.1080/23311975.2023.2240082
Le, T. (2019). The interrelationship between liquidity creation and bank capital in Vietnamese banking. Managerial Finance, 45(2), 331-347. DOI: https://doi.org/10.1108/MF-09-2017-0337
Lei, A. C., & Song, Z. (2013). Liquidity creation and bank capital structure in China. Global Finance Journal, 24(3), 188-202. DOI: https://doi.org/10.1016/j.gfj.2013.10.004
Mazioud Chaabouni, M., Zouaoui, H., & Ellouz, N. Z. (2018). Bank capital and liquidity creation: new evidence from a quantile regression approach. Managerial Finance, 44(12), 13821400. DOI: https://doi.org/10.1108/MF-11-2017-0478
Meslier, C., Tacneng, R., & Tarazi, A. (2014). Is bank income diversification beneficial? Evidence from an emerging economy. Journal of International Financial Markets, Institutions and Money, 31, 97-126. DOI: https://doi.org/10.1016/j.intfin.2014.03.007
Niu, J. (2022). Is bank liquidity creation procyclical? Evidence from the US. Finance Research Letters, 47, 102603 DOI: https://doi.org/10.1016/j.frl.2021.102603
Paul Choi, B., Park, J., & Ho, C. L. (2013). Liquidity creation or de-creation: evidence from US property and liability insurance industry. Managerial Finance, 39(10), 938-962. DOI: https://doi.org/10.1108/MF-11-2012-0243
Pham, H. S. T., Le, T., & Nguyen, L. Q. T. (2021). Monetary policy and bank liquidity creation: does bank size matter? International Economic Journal, 35(2), 205-222. DOI: https://doi.org/10.1080/10168737.2021.1901762
Poudel, S. R. (2018). Impact of credit risk on profitability of commercial banks in Nepal. Journal of Applied and Advanced Research, 3(6), 161-170. DOI: https://doi.org/10.21839/jaar.2018.v3i6.230
Repullo, R. (2004), “Capital requirements, market power, and risk-taking in banking”, Journal of Financial Intermediation,13 (2), 156-182. DOI: https://doi.org/10.1016/j.jfi.2003.08.005
Sahyouni, A., & Wang, M. (2019). Liquidity creation and bank performance: evidence from MENA. ISRA International Journal of Islamic Finance. 11(1), 27-45 DOI: https://doi.org/10.1108/IJIF-01-2018-0009
Sahyouni, A., Zaid, M. A., & Adib, M. (2021). Bank soundness and liquidity creation. EuroMed Journal of Business, 16(1), 86-107. DOI: https://doi.org/10.1108/EMJB-04-2019-0061
Shahid, M. (2014). Effect of inflation and unemployment on economic growth in Pakistan. Journal of economics and sustainable development, 5(15), 103-106.
Sharma, S., & Anand, A. (2018). Income diversification and bank performance: evidence from BRICS nations. International Journal of Productivity and Performance Management, 67(9), 1625-1639. DOI: https://doi.org/10.1108/IJPPM-01-2018-0013
Sinha, P., & Grover, N. (2021). Interrelationship Among Competition, Diversification and Liquidity Creation: Evidence from Indian Banks. Margin: The Journal of Applied Economic Research, 15(2), 183-204. DOI: https://doi.org/10.1177/0973801021990398
Tan, Y. S. (2023). Internal control and bank liquidity creation: Evidence from China. Research in International Business and Finance, 66, 102030. DOI: https://doi.org/10.1016/j.ribaf.2023.102030
Thaker, H. M. T., Ee, T. S., Sin, C. F., & Man, W. H. (2013). The macroeconomic determinants of bank credit in Malaysia an analysis via the error correction model (ECM). Skyline Business Journal, 9(1).
Toh, M. Y. (2019). Effects of bank capital on liquidity creation and business diversification: Evidence from Malaysia. Journal of Asian Economics, 61, 1-19. DOI: https://doi.org/10.1016/j.asieco.2018.12.001
Toh, M. Y., & Jia, D. (2023). Determinants of bank liquidity creation: A comparison between Islamic Banks and conventional banks in a dual banking system. The Singapore Economic Review, 68(03), 963-999. DOI: https://doi.org/10.1142/S0217590821500053
Tran, D. V. (2020). Bank business models and liquidity creation. Research in International Business and Finance, 53, 101205 DOI: https://doi.org/10.1016/j.ribaf.2020.101205
Umar, M., & Sun, G. (2016). Determinants of different types of bank liquidity: evidence from BRICS countries. China Finance Review International, 6(4),380-403. DOI: https://doi.org/10.1108/CFRI-07-2015-0113
Tran, V. T., & Nguyen, H. (2023). Liquidity Creation, Bank Competition and Revenue Diversification. The Quarterly Journal of Finance, 13(03), 2350007. DOI: https://doi.org/10.1142/S2010139223500076
Viverita, V., Bustaman, Y., & Danarsari, D. N. (2023). Liquidity creation by Islamic and conventional banks during the Covid-19 pandemic. Heliyon, 9(4). DOI: https://doi.org/10.1016/j.heliyon.2023.e15136
Von Thadden, E.L. (2004). Bank capital adequacy regulation under the new Basel Accord. Journal of Financial Intermediation, 13(2), 90-95 DOI: https://doi.org/10.1016/j.jfi.2003.04.002
