Does promoters’ holding influence the liquidity risk of banks?

Abstract

Purpose

This paper aims to evaluate whether promoter holding influences a bank’s liquidity in India’s leading emerging market. Furthermore, it also evaluates the moderating role of risk-weighted assets (RWA) on the relationship between promoter holding and liquidity.

Design/methodology/approach

The data consists of 24 banks for the period of 12 years from 2010 to 2021. Static panel data is used to analyze the relationship between the liquidity coverage ratio (LCR) as the dependent variable, the promoter used as an explanatory variable and RWA used as a moderating variable in this study.

Findings

This study concludes that an increase in promoter holding helps to improve the liquidity of Indian banks. Moreover, it also shows that using RWA as a moderating term enhances the relationship between promoter holdings and Indian banks’ liquidity.

Research limitations/implications

This study evaluated the impact of promoter ownership solely on the LCR, a statistic used to measure the short-term liquidity of banks in the Indian setting. Additional corporate governance factors, such as the makeup of the board of directors, relevant ownership concentration factors and external factors with the potential to affect the liquidity position of banks, could potentially be the subject of future investigations.

Practical implications

This paper has both managerial and policy-level implications. It shows that it is advantageous for banks’ ownership composition to include more enormous promoter holdings to enhance banks’ liquidity. Policymakers can, thus, formulate policies to encourage banks to have more extensive promoter holdings.

Originality/value

The impact of promoter ownership on bank liquidity has not been evaluated in earlier research projects. Furthermore, the use of RWA as a moderating variable to determine this link has not been fully investigated, particularly in the context of a developing country like India.

Citation

Pinto, G., Rastogi, S. and Agarwal, B. (2024), "Does promoters’ holding influence the liquidity risk of banks?", Journal of Financial Regulation and Compliance, Vol. 32 No. 2, pp. 211-229. https://doi.org/10.1108/JFRC-09-2023-0144