Threshold Effect of Bank Capital on Liquidity Creation in Selected Developing and Developed Countries

The objective of this study is to examine the threshold effect of bank capital on liquidity creation in 59 developing countries and 37 developed countries over the period 2004–2023. To this end, the Panel Smooth Transition Regression (PSTR) model, which is an appropriate approach for analyzing heterogeneous panel data, is employed. The results indicate that the threshold value of the transition variable (i.e., the logarithm of bank capital) is estimated at 3.0034 in the model for developed countries, with a slope parameter of 7.4897. In the model for developing countries, the threshold value is estimated at 2.996, while the slope parameter is 16.5003. The findings for developed countries reveal that, in the first regime, economic growth and financial stability negatively affect liquidity creation. After crossing the threshold level and entering the second regime, the magnitude of this negative effect decreases, although it remains negative. The results also show that financial inclusion has a positive impact on liquidity creation in the first regime; however, in the second regime, its effect gradually diminishes and becomes negative. In addition, the financial development index has a positive and statistically significant effect on liquidity creation in both regimes. Furthermore, results for developing countries indicate that economic growth and financial stability negatively affect liquidity creation in both regimes. The findings also demonstrate that financial inclusion positively affects liquidity creation in the first regime, and although its impact gradually declines in the second regime, it remains positive. Moreover, the coefficients of the financial development index are positive and statistically significant in both regimes, indicating a positive contribution to liquidity creation.