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The interrelationship between bank capital and liquidity creation: A non-linear perspective from the Asia-Pacific region

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  • Gupta, Juhi
  • Kashiramka, Smita
  • Ly, Kim Cuong
  • Pham, Ha

Abstract

The study investigates nonlinearity in the interrelationship between liquidity creation (LC) and bank capital. It addresses the reverse-causality concerns by employing a simultaneous equations model with a two-step system GMM estimator. The data comprises 597 commercial banks in the Asia-Pacific region from 2006 to 2019. The findings indicate a U-shaped bi-directional relationship between bank capital and LC, with a significant moderating effect of bank size. The results also hold for Advanced economies (AEs), Basel II and Basel III periods. However, there is an inverted U-shaped impact of capital on LC in the Emerging market and developing economies (EMDEs). The findings call for coordination between liquidity and capital regulations. Further, policymakers should adopt a tailored regulatory approach for banks instead of uniform blanket regulations, as the latter might prove to be counterproductive.

Suggested Citation

  • Gupta, Juhi & Kashiramka, Smita & Ly, Kim Cuong & Pham, Ha, 2023. "The interrelationship between bank capital and liquidity creation: A non-linear perspective from the Asia-Pacific region," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 793-820.
    • Handle: RePEc:eee:reveco:v:85:y:2023:i:c:p:793-820
    DOI: 10.1016/j.iref.2023.02.017
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    More about this item

    Keywords

    Bank liquidity creation; Bank capital; Bank regulation; Asia-Pacific; Basel III;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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