Bank soundness and liquidity creation
ISSN: 1450-2194
Article publication date: 12 January 2021
Issue publication date: 8 March 2021
Abstract
Purpose
The purpose of this paper is to investigate how much liquidity banks create and how liquidity creation changed over time in the MENA countries and to examine the soundness of banks in these countries based on the CAME rating system, in addition to investigating the relationship between CAME ratios and liquidity creation of these banks.
Design/methodology/approach
The study regresses the CAME ratios together with other control variables to model liquidity creation. The robustness of the results is evaluated by using a different measure of liquidity creation and by excluding the observations of the Islamic banks.
Findings
The results show that the CAME rating system, as an indicator of bank soundness, is negatively related to bank liquidity creation. Specifically, capital adequacy, management efficiency and earning ability ratios affect the on-balance sheet components of liquidity creation, while asset quality ratio affects its off-balance sheet component.
Practical implications
The paper offers insights to regulators and banks managers in terms of better understanding of the negative relationship between CAME rating system and bank liquidity creation.
Originality/value
This paper sheds more light on the relationship between bank soundness and liquidity creation by using the ratios of the CAMEL rating system as an indicator of bank strength and soundness.
Keywords
Citation
Sahyouni, A., Zaid, M.A.A. and Adib, M. (2021), "Bank soundness and liquidity creation", EuroMed Journal of Business, Vol. 16 No. 1, pp. 86-107. https://doi.org/10.1108/EMJB-04-2019-0061
Publisher
:Emerald Publishing Limited
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