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Interaction between credit risk, liquidity risk, and bank solvency performance: a panel study of Indian banks

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  • Arindam Bandyopadhyay

    (National Institute of Bank Management (NIBM))

  • Mayuri Saxena

    (Accenture)

Abstract

Liquidity risk and credit risk are considered the two main sources of banking risk. This paper is an attempt to investigate their interconnectedness and impact on solvency performance banks. Using panel data of 42 public and private commercial banks in India over the period 2010–2019, we find that a bank’s liquidity as well as asset quality positions strongly influence its financial soundness (measured in terms of Z-solvency score). Further, bank size, capital positions, and income diversification are the significant drivers of a bank’s solvency performance. Our empirical results reveal that Basel 3 norms implementation by the Reserve Bank of India has strengthened the liquidity situation and the financial stability of Indian banks. We argue that it is essential for commercial banks to manage their credit risk and liquidity risk more proactively to remain financially solvent.

Suggested Citation

  • Arindam Bandyopadhyay & Mayuri Saxena, 2023. "Interaction between credit risk, liquidity risk, and bank solvency performance: a panel study of Indian banks," Indian Economic Review, Springer, vol. 58(2), pages 311-328, December.
    • Handle: RePEc:spr:inecre:v:58:y:2023:i:2:d:10.1007_s41775-023-00202-y
    DOI: 10.1007/s41775-023-00202-y
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    More about this item

    Keywords

    Credit risk; Liquidity risk; Bank solvency performance;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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