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Bank performance and liquidity management

Author

Listed:
  • I-Ju Chen

    (Yuan Ze University)

  • Hsiangping Tsai

    (National Taipei University of Business)

  • Yan-Shing Chen

    (National Taiwan University)

  • Wei Chih Lin

    (Yuan Ze University)

  • Ting-Yu Li

    (National Taiwan University)

Abstract

This paper investigates bank liquidity management and its effect on bank performance. Commercial bank’s balance the tradeoff between holding liquid assets and investing in risky assets to maximize profits. Holding more liquid assets lowers the liquidity risk of banks, but it also increases their operation costs and likely lowers their profits. Therefore, we hypothesize that a bank’s liquidity management policy matters for bank performance. We analyze bank data from Call Reports from 1990 to 2020. We compute a comprehensive liquidity measures and estimate the adequate liquidity level for each bank as the basis for evaluating the liquidity management of a bank. We show that banks that maintain an adequate liquidity ratio tend to experience better operating performance, greater stability, and lower bankruptcy risk. We also investigate the effect of bank liquidity management under different economic conditions. Our study highlights the importance of bank liquidity management.

Suggested Citation

  • I-Ju Chen & Hsiangping Tsai & Yan-Shing Chen & Wei Chih Lin & Ting-Yu Li, 2025. "Bank performance and liquidity management," Review of Quantitative Finance and Accounting, Springer, vol. 64(4), pages 1453-1490, May.
    • Handle: RePEc:kap:rqfnac:v:64:y:2025:i:4:d:10.1007_s11156-024-01342-9
    DOI: 10.1007/s11156-024-01342-9
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    More about this item

    Keywords

    Bank liquidity management; Operating performance; Insolvency risk; Bank risk;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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