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A study on the interaction of capital, liquidity and bank stability

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  • Población García, Francisco Javier
  • Suárez, Nuria

Abstract

The purpose of this paper is to empirically examine the effects of capital and liquidity on bank stability as well as the existence of a potential complementary or substitute relationship between both dimensions to explain bank stability. We use a sample of 16,061 banks from 27 countries during the period 2013-2023. Our results show that both capital and liquidity increase bank stability. However, the joint interactive effect presents a negative coefficient indicating the existence of a potential substitution effect between both variables. We also provide evidence on market power acting as a potential mechanism explaining the baseline relationships. Furthermore, the results seem to be modulated by specific bank- and country-level factors. JEL Classification: G20, G21, G28, K00

Suggested Citation

  • Población García, Francisco Javier & Suárez, Nuria, 2025. "A study on the interaction of capital, liquidity and bank stability," Working Paper Series 3134, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20253134
    Note: 1845518
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    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
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • K00 - Law and Economics - - General - - - General (including Data Sources and Description)

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