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Liquidity creation and cost efficiency of banks in emerging markets under Basel III regime: Evidence of bidirectionality

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  • Verma, Geetanjali
  • Kashiramka, Smita

Abstract

The study attempts to investigate the interrelationship between liquidity creation (LC) and cost efficiency of banks in the Basel III era. It employs a simultaneous equations model (SEM) and a two-step system generalized method of moments (GMM) estimation procedure to deal with the dynamic nature of variables and reverse causality. The sample includes 838 commercial banks in emerging markets between 2013 and 2022. The cost efficiency of banks is derived using an input-focused data envelopment analysis (DEA) framework. The findings indicate a positive bidirectional relationship between LC and cost efficiency. Additionally, the results showcase a positive bidirectional relationship between asset-side LC, off-balance sheet (OBS)-side LC, and cost efficiency, highlighting that higher cost efficiency boosts asset-side and OBS-side LC. Contrarily, it reduces liquidity created on the liability-side (but only by a lesser amount), leading to an overall increase in total LC. The results also suggest that a rise in asset-side and OBS-side LC increases cost efficiency, while liability-side LC has no impact. The study extends the analysis by examining the bidirectional relationship between Basel III liquidity requirements, liquidity hoarding, and cost efficiency. It also offers a fresh viewpoint on the impact of the Covid-19 pandemic on the cost efficiency of banks.

Suggested Citation

  • Verma, Geetanjali & Kashiramka, Smita, 2026. "Liquidity creation and cost efficiency of banks in emerging markets under Basel III regime: Evidence of bidirectionality," Pacific-Basin Finance Journal, Elsevier, vol. 98(C).
    • Handle: RePEc:eee:pacfin:v:98:y:2026:i:c:s0927538x26001320
    DOI: 10.1016/j.pacfin.2026.103186
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    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • 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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