Bank capital and bank stability: The mediating role of liquidity creation and moderating role of asset diversification

Vu, Thanh Huu; Ngo, Trung Thanh

doi:10.1080/23311975.2023.2208425

Cited by 5 publications

(5 citation statements)

References 67 publications

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“…(2022) and Fu et al. (2016), support the notion that higher capital improves banks' liquidity creation, while others such as Huu Vu and Thanh Ngo (2023), Gupta and Kashiramka (2020), Le (2018) and Le and Pham (2021) indicate that greater capital hinders bank liquidity creation. This study, thus, aligns with the studies that found a positive and significant relationship between bank capital and liquidity creation.…”

Section: Discussionmentioning

confidence: 82%

“…The theory has been supported by some empirical studies that find a negative relationship between bank capital and bank liquidity creation (e.g. Huu Vu and Thanh Ngo, 2023;Mdaghri and Oubdi, 2021;D ıaz and Huang, 2017;Gupta and Kashiramka, 2020;Le, 2018;Le and Pham, 2021).…”

Section: Literature Review 21 Theoretical Foundationmentioning

confidence: 86%

“…, 2013; Tran et al. , 2016; Huu Vu and Thanh Ngo, 2023; Mdaghri and Oubdi, 2021; Díaz and Huang, 2017; Le, 2018; Le and Pham, 2021; Evans and Haq, 2022; Sinha and Grover, 2019; Toh, 2019) and studies that support the risk-absorption hypothesis which predicts a positive relationship between bank capital and liquidity creation (see, Gupta et al ., 2023; Horváth et al ., 2014; Fu et al. , 2016; Tran et al ., 2016; Le, 2018; Casu et al.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Empirical literature on bank capital and liquidity creation is divided between studies that support the financial fragility theory which proposes a negative relationship between bank capital and liquidity creation (see, Distinguin et al, 2013;Tran et al, 2016;Huu Vu and Thanh Ngo, 2023;Mdaghri and Oubdi, 2021;D ıaz and Huang, 2017;Le, 2018;Le and Pham, 2021;Evans and Haq, 2022;Sinha and Grover, 2019;Toh, 2019) and studies that support the riskabsorption hypothesis which predicts a positive relationship between bank capital and liquidity creation (see, Gupta et al, 2023;Horv ath et al, 2014;Fu et al, 2016;Tran et al, 2016;Le, 2018;Casu et al, 2019;Hsieh et al, 2022;Yahaya et al, 2023;Abbas et al, 2023;Zheng and Cronje, 2019;Kinini et al, 2023;Mdaghri and Oubdi, 2021). For instance, Hsieh et al (2022) investigate the relationship between bank capital and liquidity creation in 35 Asian countries from 2001 to 2018.…”

Section: Bank Capital and Liquidity Creationmentioning

confidence: 99%

“…Their generalized methods of moments (GMM) results show that greater capital has a negative relationship with liquidity creation, supporting the financial fragility position. Similarly, Huu Vu and Thanh Ngo (2023) investigate whether bank capital influenced liquidity creation in 27 banks in Vietnam from 2014 to 2021. Their results show a negative relationship between bank capital and liquidity creation.…”

Section: Literature Reviewmentioning

confidence: 99%

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Bank capital and liquidity creation in Sub-Saharan Africa: the role of quality institutions

Bawuah

2024

AJEMS

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PurposeThis study investigates the relationship between bank capital and liquidity creation and further examines the effect that institutional quality has on this relationship in Sub-Saharan Africa (SSA).Design/methodology/approachThe data comprise 41 universal banks in nine SSA countries from 2010 to 2022. The study employs the two-step system generalized methods of moments and further uses alternative estimators such as the fixed-effect and two-stage least squares methods.FindingsThe empirical results show that bank capital has a direct positive and significant effect on liquidity creation. In addition, the positive effect of bank capital on liquidity creation is enhanced, particularly in a strong institutional environment. The results imply that nonconstraining capital regulatory policies bolster bank solvency, improve risk-absorption capacity and increase liquidity creation.Practical implicationsThis study has several policy implications. First, it provides empirical evidence on the position of banks in SSA on the financial fragility and risk-absorption hypothesis of bank capital and liquidity creation debates. This study shows that the effect of bank capital on liquidity creation in SSA countries is positive and supports the risk-absorption hypothesis. Second, this study highlights that a country's quality institutions can complement bank capital to increase liquidity creation. In addition, this study highlights that nonconstraining capital regulatory policies will bolster bank solvency, improve risk-absorption capacity and increase liquidity creation.Originality/valueThe novelty of this study is that it introduces the country's quality institutional environment into bank capital and liquidity creation links for the first time in SSA.

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Section: Discussionmentioning

confidence: 82%

Section: Literature Review 21 Theoretical Foundationmentioning

confidence: 86%

Section: Literature Reviewmentioning

confidence: 99%

Section: Bank Capital and Liquidity Creationmentioning

confidence: 99%

Section: Literature Reviewmentioning

confidence: 99%

See 3 more Smart Citations

Bank capital and liquidity creation in Sub-Saharan Africa: the role of quality institutions

Bawuah

2024

AJEMS

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Bank stability and economic growth in Sub-Saharan Africa: trade-offs or opportunities? And how do institutions and bank capital affect this trade-off?

Bawuah

2024

Cogent Economics & Finance

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Banking sector and economic growth in the digital transformation era: insights from maximum likelihood and Bayesian structural equation modeling

Murrar,

Asfour,

Paz

2024

AJEB

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PurposeIn the digital era, the banking sector has transformed into a powerful intermediary, effectively connecting surplus and deficit units. This dynamic landscape empowers savers to secure their finances and generate returns, while simultaneously enabling businesses and individuals to access capital for investment and promoting economic growth. This study explores the relationships among banking development dimensions – represented by primary assets and liabilities, bank capital (core capital and required reserves) and economic growth as measured by components of gross domestic product (GDP).Design/methodology/approachThe study consolidated monthly balance sheets from digital banks over a 20-year period, resulting in an aggregate monthly balance sheet that reflects the financial position of all digital banks in the Palestinian economy. The research employs both maximum likelihood and Bayesian structural equation modeling to measure the causal pathways of the consolidated balance sheet with the individual components of GDP.FindingsThe results revealed that bank main assets (investments and loans) and liabilities (deposits) collectively explain for 97% of bank capital. Investments and loans demonstrate significant negative correlations with bank capital, while deposits exhibit a positive impact. This leads to a fundamental conclusion that a substantial proportion of retained earnings within the banking sector is reinvested, fueling expansion and growth. Additionally, the results showed a significant relationship between bank capital and various GDP components, including private consumption, gross investment and net exports (p = 0.000). However, while the relationship between bank capital and government spending was insignificant in the maximum likelihood estimation, Bayesian estimation revealed a slight yet positive impact of bank capital on government spending.Originality/valueThis research stands out due to its unique exploration of the intricate relationship between bank sector development dimensions, primary assets and liabilities and their impact on bank capital in the digital era. It offers fresh insights by dividing this connection into specific dimensions and constructs, utilizing a comprehensive two-decade dataset covering the digital banks records.

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Bank capital and bank stability: The mediating role of liquidity creation and moderating role of asset diversification

Cited by 5 publications

References 67 publications

Bank capital and liquidity creation in Sub-Saharan Africa: the role of quality institutions

Bank capital and liquidity creation in Sub-Saharan Africa: the role of quality institutions

Bank stability and economic growth in Sub-Saharan Africa: trade-offs or opportunities? And how do institutions and bank capital affect this trade-off?

Banking sector and economic growth in the digital transformation era: insights from maximum likelihood and Bayesian structural equation modeling

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