Do the Same Determinants Affect Banks’ Profitability and Liquidity? Evidence from West Balkan Countries Using a Panel Data Regression Analysis

Abstract

This study aims to determine whether the same bank-specific and macroeconomic determinants affect banks’ profitability and liquidity. To achieve the set goal, panel data regression analysis was applied with fixed effects or random effects depending on the results of the Hausman test, as explained in the Results. The research is based on the use of aggregate data on bank-specific and macroeconomic determinants of banks’ profitability and liquidity in West Balkan countries during the period from 2007 to 2022. The dependent variables in the study are ROA, ROE used as proxies for banks’ profitability, and banks’ liquid reserves to banks’ total assets as a proxy for banks’ liquidity. The findings confirm that the bank-specific and macroeconomic determinants affect both banks’ profitability and liquidity in the same direction, except for a few variables. The main contribution of this research is a comprehensive and parallel view of banks’ profitability and liquidity determinants that enables a guide for bank management to better understand the significance of bank-specific and macroeconomic determinants’ effects on their business. The obtained results can improve the balance between the two important principles of banking business.

Modelling Profitability Determinants in the Banking Sector: The Case of the Eurozone

“…On the national level, the findings of this study can be useful to policy makers and bank managers, since it gives them information on the most influencing determinants of the banks' profitability. Accordingly, banks must create procedures, policies and strategies in line with their macroeconomic environment [53]. The limitation of this research is that we have not included the effects of cycles in our analysis.…”

“…Accordingly, the banking system can be identified as one of the most important economic sectors [3] (p. 2761), where banks play an active role in the financial markets of any nation [4] (pp. [44][45][46][47][48][49][50][51][52][53][54][55][56][57][58][59][60].…”

“…According to the Basel principals [5] (pp. [49][50][51][52][53][54][55][56][57][58][59][60], banks cannot increase their investments in risky assets insofar as they do not recapitalize. High levels of bank profitability are crucial, as seen, for several reasons.…”