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Asymmetric relationship between diversification and liquidity creation: Empirical evidence from GCC

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  • Ali, Shoaib
  • Rubbaniy, Ghulame
  • Syriopoulos, Costas
  • Tee, Kienpin

Abstract

This study examines how bank diversification affects liquidity creation by using the bank level data of GCC countries. We use data from 205 banks in GCC over the period of 2005–2019. To test the hypothesized relationship, we employ the GMM methodological framework. The findings of the study reveal that both income and asset diversification adversely affect the narrow and broad measure of banks' liquidity creation. However, funding diversification positively(negatively) influences the broad(narrow) measure of liquidity creation. The results highlight that bank diversification is a double-edged sword; although it can help in reducing risk, but it also vanishes the banks' ability to create liquidity. However, the in-depth and detailed analyses reveal that the impact is asymmetrical across large, small, well-capitalized, and undercapitalized banks. Furthermore, comparing the normal and crisis periods highlights that banks behave differently in different economic conditions. The results have several implications for the bank managers and decision makers; they must consider the trade-off between liquidity creation and level of diversification. Additionally, the asymmetry in results implies that managers must consider the level/bank's specific characteristics while making such strategic decisions.

Suggested Citation

  • Ali, Shoaib & Rubbaniy, Ghulame & Syriopoulos, Costas & Tee, Kienpin, 2025. "Asymmetric relationship between diversification and liquidity creation: Empirical evidence from GCC," The Journal of Economic Asymmetries, Elsevier, vol. 31(C).
    • Handle: RePEc:eee:joecas:v:31:y:2025:i:c:s170349492500009x
    DOI: 10.1016/j.jeca.2025.e00409
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    Keywords

    Diversification; Liquidity creation; Asymmetry; GCC region; GMM;
    All these keywords.

    JEL classification:

    • 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
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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