Revisiting the Impact of Stock Market Liquidity on Bank Liquidity Creation: Evidence from Malaysia

Toh, Moau Yong; Gan, Christopher; Li, Zhaohua

doi:10.1080/1540496x.2018.1496420

Cited by 16 publications

(6 citation statements)

References 61 publications

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“…They found that capital and population were affecting both measures of liquidity creation negatively, whereas return on equity and gross national savings rate had a positive impact on liquidity creation. Toh et al (2019) find that stock market liquidity enhances liquidity creation on both on as well as off-balance sheet side of banks. They also determined a positive relationship between market power and liquidity creation.…”

Section: Literature Reviewmentioning

confidence: 88%

Determinants, persistence and value implications of liquidity creation: an evidence from Indian banks

Grover

Sinha

2021

JABS

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Purpose The purpose of this paper is to explore the micro and macro factors affecting liquidity creation by scheduled commercial banks (excluding Regional Rural Bank) in India from 2005 to 2018. Design/methodology/approach Two measures of liquidity creation, the broad and narrow measures, are constructed using RBI data available on Indian banks. System generalized method of moments has been applied to explore the factors affecting liquidity creation. Findings This study finds high level of persistence in liquidity creation in banks. Variation in the broad measure is explained by equity ratio, market share, GDP, gross savings and lending rate, whereas the narrow measure is explained by equity ratio, market share, size and lending rate. The Global Financial Crisis had a negative effect on liquidity creation as per both the measures, and the impact was more severe for the broad measure as compared to the narrow measure. Research limitations/implications This study finds a positive correlation between bank value and liquidity creation which suggests that the investors favourably evaluate banks that create more liquidity. This study is confined to India only. Practical implications There is a negative influence of capital on liquidity created by banks, which implies a trade-off that exists between financial stability and liquidity creation. Basel III norms impose higher capital and liquidity standards which will have negative implications for liquidity creation. Originality/value To the best of authors’ knowledge, this is the first study in the Indian context that focusses on factors affecting liquidity creation in a dynamic framework and determines the relationship between liquidity creation and market value of a bank.

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Section: Literature Reviewmentioning

confidence: 88%

Determinants, persistence and value implications of liquidity creation: an evidence from Indian banks

Grover

Sinha

2021

JABS

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“…Most of these studies investigated this role in relation to bank capital (e.g. Casu et al, 2019;Fu et al, 2015;Lei and Song, 2013), market liquidity (Chatterjee, 2015;Toh et al, 2018), bank stability (Gupta and Kashiramka, 2020), profitability (Duan and Niu, 2020;Tran et al, 2016), economic output (Berger and Sedunov, 2017;Fidrmuc et al, 2015) and systemic risk (Davydov et al, 2021;Xingmin et al, 2021). IJOEM 17,7…”

Section: Studies Regarding Bank Liquidity Creationmentioning

confidence: 99%

How does bank liquidity creation affect non-performing loans in the MENA region?

Mdaghri¹

2021

IJOEM

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PurposeThe study aims to empirically examine the effect of bank liquidity creation on non-performing loans (NPLs) in the Middle East and North Africa (MENA) region.Design/methodology/approachBerger and Bouwman's (2009) three-step methodology was employed to calculate the level of liquidity creation of a selected sample of 111 commercial banks in ten MENA countries from 2010–2017. Next, the two-step system generalized method of moments (GMM) estimator was used to investigate the linkage between bank liquidity creation and NPLs.FindingsThe results demonstrated a significant negative effect of bank liquidity creation on NPLs in the short and long term, implying that liquidity creation through both on- and off-balance sheet activities decreases NPLs. These findings accord with the “economic-enhancing” view. Furthermore, regression analysis investigated whether this relationship remained similar for Islamic and conventional banks. The results showed that liquidity creation diminishes Islamic and conventional bank NPLs.Research limitations/implicationsThe empirical findings raise several significant policy implications. Bank liquidity creation may decrease rather than increase NPLs, although the process of liquidity creation is viewed as risky by rendering banks more illiquid. Therefore, policy-makers should encourage bank liquidity creation to stimulate the economy. In a robust economy, borrowers are more likely to repay their debts, consequently diminishing banks' NPLs.Originality/valueTo the best of the author's knowledge, the current study is the first to provide empirical evidence on the effect of bank liquidity creation on NPLs in MENA countries.

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“…For example, Chatterjee (2015) and Toh et al (2019) report that stock market liquidity contributes to liquidity creation of banks (banks create liquidity by using relatively liquid liabilities, such as demand deposits, to fund relatively illiquid assets, such as business loans; empirically, Berger and Sedunov (2017) find that the positive impact of liquidity creation on economic growth is larger than the growth effects of other services provided by banks). It is worth noting that the liquidity indicators used by Chatterjee (2015) and Toh et al (2019) are different from the commonly used liquidity indicator (turnover ratio). See also Capelle-Blancard (2018), who emphasizes the dark side of stock market liquidity.…”

Section: Interactions Between Banks and Stock Marketsmentioning

confidence: 99%

From financial structure to economic growth: Theory, evidence and challenges

2021

Economic Notes

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This paper surveys the theoretical and empirical literature on the contributions of financial structure to economic growth. Whereas the theoretical literature clarifies the channels through which banks and financial markets may affect resource allocation and hence economic performance, the empirical evidence on the connection between financial structure and economic growth is mixed. There are several methodological problems inherent in the literature, including disparate studies that have been frequently mixed and confused, unsolved econometric issues (endogeneity, heterogeneity and omitted variables) and failure to consider the interaction between banks and capital markets. More rigorous single‐country studies are called for.

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Revisiting the Impact of Stock Market Liquidity on Bank Liquidity Creation: Evidence from Malaysia

Cited by 16 publications

References 61 publications

Determinants, persistence and value implications of liquidity creation: an evidence from Indian banks

Determinants, persistence and value implications of liquidity creation: an evidence from Indian banks

How does bank liquidity creation affect non-performing loans in the MENA region?

From financial structure to economic growth: Theory, evidence and challenges

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