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Testing the Non-Linear Relationship between Liquidity Risk and Bank Stability in the MENA Region

Author

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  • Mohamed Ali Khemiri

    (VPNC Lab, Faculty of Law, Economics and Management of Jendouba, University of Jendouba, Tunisia.)

Abstract

This paper aims to investigate whether the relationship between liquidity risk and bank stability is non-linear. It uses a sample of 83 MENA banks from 2005 to 2020. Due to several economic, financial, and regulation differences, the whole sample was divided into two sub-samples. The first one is related to Middle East countries and covers 56 banks while the second one is related to North African countries and covers 27 banks. We performed the Panel Smooth Threshold Regression (PSTR) model proposed by Gonz lez et al. (2005) as an empirical approach. The empirical results indicate that exists a threshold effect in the liquidity risk-bank stability relationship. More specifically, we found that below a certain threshold, the loan to-deposit-ratio does not exert any significant effect on bank stability in the Middle East; while it significantly increases the stability of banks in North African countries. Above, the same threshold, the loan-to-deposit ratio significantly decreases bank stability for the two sub-samples.

Suggested Citation

  • Mohamed Ali Khemiri, 2022. "Testing the Non-Linear Relationship between Liquidity Risk and Bank Stability in the MENA Region," International Journal of Economics and Financial Issues, International Journal of Economics and Financial Issues, vol. 13(4), pages 125-133, July.
    • Handle: RePEc:eco:journ1:2022-04-15
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    References listed on IDEAS

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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