Basel III liquidity regulatory framework and bank liquidity creation in MENA countries

Abstract

Purpose

This paper aims to investigate the potential impact of the Basel III liquidity requirements, namely, the net stable funding ratio (NSFR) and the liquidity coverage ratio (LCR), on bank liquidity creation.

Design/methodology/approach

The authors developed a dynamic panel model using the Quasi-Maximum Likelihood estimation on an unbalanced panel dataset of 129 commercial banks operating in 10 Middle Eastern and North African (MENA) countries from 2009 to 2017.

Findings

The results show that the NSFR significantly negatively affects liquidity creation. Similarly, the LCR exerts a substantial negative impact on the liquidity creation of the sampled MENA banks. These findings suggest that complying with both liquidity requirements tends to curtail liquidity creation. Moreover, further regression analysis of large and small bank sub-samples uncovered results similar to the overall MENA sample.

Research limitations/implications

The findings raise interesting policy implications and suggest a trade-off between the benefits of the financial resiliency induced by implementing liquidity requirements and the creation of liquidity essential for promoting economic growth in the region.

Originality/value

Most empirical research focuses on the relationship between bank capital and liquidity creation. To the knowledge, this paper is the first to provide empirical evidence on the effect of both the NSFR and LCR regulatory liquidity standards on bank liquidity creation in the MENA region.

Citation

Alaoui Mdaghri, A. and Oubdi, L. (2022), "Basel III liquidity regulatory framework and bank liquidity creation in MENA countries", Journal of Financial Regulation and Compliance, Vol. 30 No. 2, pp. 129-148. https://doi.org/10.1108/JFRC-01-2021-0002