Liquidity-Profitability Dynamics: Is the Banking Industry Resilient in Times of Crisis?

Abstract

The banking industry contributes to the economic expansion since it is considered the keeper and supplier of liquid capital, essential for all commercial and industrial activity. The primary goal of commercial banks is to generate profits while serving clients and maintaining liquidity positions. Hence, this study aims to examine and evaluate the relationship between liquidity (measured through the Liquid assets and Liquid assets to short-term liabilities ratio) and profitability (measured through ROA and ROE) position of the commercial banking system in North Macedonia and Serbia in order to determine whether changes in liquidity levels influence profitability. Since the ten-year examination period (2012-2021) includes the emergence of the Coronavirus global health pandemic, additional tests were conducted to find out whether the sanitary crisis caused changes in the liquidity-profitability dynamics.By employing descriptive, correlation and regression analysis, and observing two sub-periods (2010-2019 vs 2020-2021), we infer changes in the liquidity-profitability positions in times of crisis in both countries. These findings reinvigorate the knowledge on liquidity and profitability performance in times of instability as this is a pioneer study in evaluating the pandemic impact on liquidity and performance using empirics in these two markets. Furthermore, by scrutinizing the interrelationship between liquidity and profitability, the findings reveal that associations are time-dependent, with policy implications for banks and financial industry regulators.