How Does Liquidity Risk Interact with Credit Risk? A Comparison Study of Indonesia and Malaysia Banking

Abstract

This paper examines the effect of the interaction between liquidity and credit risk on bank stability in Indonesia and Malaysia. Annual data are analyzed for 24 Indonesian and 22 Malaysian commercial banks from 2010-2019. The generalized method of moments is used as a statistical analysis tool. The test results show that the increase in assets liquidity puts Indonesian Banks in a better stability condition, while in Malaysian Banks, it is the contrary. The interaction between liquidity and credit risk in Indonesian banks did not have a significant impact, while in banks in Malaysia, the interaction between the two led to a decrease in stability. This paper sheds more light on the relationship between bank risks on stability. This study proposes a different measurement of the level of bank liquidity by applying the effect of bank liquidity concentration which is measured using the Herfindahl Hirschman Index (HHI) method. This research is expected to be useful for banking management to identify the effect of joint occurrence between liquidity risk and credit risk.