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While previous literature has emphasized the causal relationship from liquidity to capital, the impact of interbank network characteristics on this relationship remains unclear. By applying the interbank network simulation, this paper aims to examine whether the causal relationship between capital and liquidity is influenced by bank positions in the interbank network.

Using the sample of 506 commercial banks established in 28 European countries from 2001 to 2013, the author adopts the generalized method of moments simultaneous equations approach to investigate whether interbank network characteristics influence the causal relationship between bank capital and liquidity.

Drawing on a sample of commercial banks from 28 European countries, this study suggests that the interconnectedness of banks within interbank loan and deposit networks shapes their decisions to establish higher or lower regulatory capital ratios in the face of increased illiquidity. These findings support the implementation of minimum liquidity ratios alongside capital ratios, as advocated by the Basel Committee on Banking Regulation and Supervision. In addition, the paper underscores the importance of regulatory authorities considering the network characteristics of banks in their oversight and decision-making processes.

This paper makes a valuable contribution to the current body of research by examining the influence of interbank network characteristics on the relationship between a bank’s capital and liquidity. The findings provide insights that add to the ongoing discourse on regulatory frameworks and emphasize the necessity of customized approaches that consider the varied interbank network positions of banks.

Capital, risk and liquidity are the vitality of the banking industry, which can improve the efficiency of banking and promote the efficiency of resource allocation. The purpose of this study is to examine how Basel III new liquidity ratios affect bank capital and risk adjustments and how banks respond to the new liquidity rules.

The authors adopted the system generalized method of moments (GMM) to examine how Basel III new liquidity ratios affect bank capital and risk adjustments and how banks respond to the new liquidity rules. Based on the call reports data from banks, GMM was used to test the hypotheses that new liquidity ratios affect bank capital and risk adjustments, as well as how banks respond to the regulation.

The results indicate banks targeted capital, risk and liquidity and simultaneously coordinate short-term adjustments in capital and risk. New liquidity measures enable banks to coordinate risk and liquidity decisions. Short-term adjustments in new liquidity rules inversely impact bank capital. Short-term adjustments in new liquidity rules inversely impact bank capital and capital adjustments adversely affect changes in the liquidity coverage ratio (LCR).

The primary results revealed that Ghanaian banks simultaneously coordinate and target capital, risk exposure and liquidity level. Also, capital adjustments positively influence risk adjustments and vice versa while bidirectional negative coordination exists between bank capital and risk on one hand and liquidity on the other hand. Short-term adjustments in new liquidity rule inversely impact bank capital and capital adjustments adversely affect changes in the LCR. The findings partially confirm the theoretical predictions of Repullo (2005) regarding the negative links between capital, risk and liquidity but the authors have higher capital induces higher risk.

Banks should balance off their targeted risk and liquidity in order not to sacrifice capital accumulation for liquidity.

This research offers new contributions in the research of bank management of capital and liquidity toward banks during a financial crisis from a theoretical perspective and trust management from an applicative perspective.

This research explores the role of economic growth to influence the inter-relationship between capital, liquidity and profitability of commercial banks in selected asian emerging economies.

To achieve the research purpose, an empirical model was constructed to examine the role of economic growth in the inter-relationship between banks' capital, liquidity and profitability. The empirical model was tested through two stage lease square (2SLS) regression analysis using annual data of Asian commercial banks ranges from 2011 to 2019.

The findings indicate that bank capital and liquidity are interdependent and determined simultaneously. The outcome demonstrates that the strength of the inter-relationship between banks' capital, liquidity, and profitability improves when economic growth is taken into account in the analysis. The results report that market funding, loan ratio, credit risk, bank size and bank efficiency are significant indicators to influence commercial banks' liquidity, profitability and capital in Asian emerging economies. The findings are heterogeneous across large, medium and small-sized banks in emerging economies of Asia.

The results highlight that the model provides robust results with respect to sign and significance. However, the coefficient remains underestimated without incorporating economic growth, which has important implications for decision-makers and bankers.

To the best of authors’ knowledge, this is the first study that examines the role of economic growth to influence the inter-relationship between capital, liquidity and bank profitability in the emerging economies of Asia.

The study seeks to evaluate the effect of capital adequacy and competition on the liquidity creation of Kenyan commercial banks.

Unbalanced panel data from 36 Kenyan commercial banks with licenses from 2001 to 2020 is used in the study. The generalized method of moments (GMM), a two-step system, is employed in the investigation. To increase the robustness and prevent erroneous findings, serial correlation tests and instrumental validity analyses are used. The methodology developed by Berger and Bouwman (2009) is used to estimate the commercial banks' levels of liquidity creation.

The study supports the financial fragility-crowding out hypothesis by finding a significant negative effect of capital adequacy on the liquidity creation of commercial banks. The research also identifies a significant inverse relationship between competition and liquidity creation, depicting competition's value-destroying effect.

A trade-off exists between capital adequacy and liquidity creation, which must be carefully evaluated as changes in capital requirements are considered. The value-destroying effect of competition on liquidity creation presents a case for policy geared toward consolidating banks' operations through possible mergers and acquisitions.

To the best of the authors' knowledge, this is the first study to empirically offer evidence concurrently on the effect of competition and capital adequacy on the liquidity creation of commercial banks in a developing economy such as Kenya. Additionally, the authors employ a novel measure of competition at the firm level.

This study strives to examine the relationship between bank capital and bank liquidity level considering the joint determination of both variables pointed out in the related literature. The evidence is from the Gulf Cooperation Council (GCC) countries: Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain and Oman. The theory of banking postulates that bank capital and bank liquidity are interrelated through various links. The study conjectures that large GCC banks do not have a concern with respect to liquidity due to the implicit guarantee of GCC wealthy governments to bank deposits.

The study sample is comprised of all chartered GCC conventional and Islamic banks. The study employs several on-balance sheet ratios to proxy for bank capital and liquidity as defined in the banking literature. It also employs a related econometric model that considers the simultaneity issue pointed out in the related literature.

The results of the study reveal that GCC banks react positively when facing illiquidity by strengthening their capital ratio. Further analysis reveals that only small GCC banks (conventional and Islamic) tend to increase their capital levels when facing a liquidity shortage, which confirms the study conjecture that larger GCC banks have no credible concern about their liquidity position. Employing an alternative measure of liquidity does not change the results. This finding supports the financial fragility structure and the crowding out of deposits hypotheses.

The study contributes to the literature by employing a novel estimation approach to explore the difference in results as the sample banks represent two banking regimes, the conventional banks as well as the Islamic banks. Also, the study implicitly suggests that further research in this area could support the need to impose minimum and globally uninformed liquidity standards on banks.

This study investigates the relationship between bank capital and liquidity creation and further examines the effect that institutional quality has on this relationship in Sub-Saharan Africa (SSA).

The data comprise 41 universal banks in nine SSA countries from 2010 to 2022. The study employs the two-step system generalized methods of moments and further uses alternative estimators such as the fixed-effect and two-stage least squares methods.

The empirical results show that bank capital has a direct positive and significant effect on liquidity creation. In addition, the positive effect of bank capital on liquidity creation is enhanced, particularly in a strong institutional environment. The results imply that nonconstraining capital regulatory policies bolster bank solvency, improve risk-absorption capacity and increase liquidity creation.

This study has several policy implications. First, it provides empirical evidence on the position of banks in SSA on the financial fragility and risk-absorption hypothesis of bank capital and liquidity creation debates. This study shows that the effect of bank capital on liquidity creation in SSA countries is positive and supports the risk-absorption hypothesis. Second, this study highlights that a country's quality institutions can complement bank capital to increase liquidity creation. In addition, this study highlights that nonconstraining capital regulatory policies will bolster bank solvency, improve risk-absorption capacity and increase liquidity creation.

The novelty of this study is that it introduces the country's quality institutional environment into bank capital and liquidity creation links for the first time in SSA.

The purpose of this paper is to examine the effect of bank capital on liquidity creation. Especially, the authors test two competing hypotheses: the “risk absorption” hypothesis and the “financial fragility-crowding out” hypothesis that describe such association in the context of UK and French banking industry.

The authors use data collected from Bankscope for commercial banks pertaining to the aforementioned countries. The sample period ranges from 2000 to 2014. Liquidity creation was measured using a novel approach proposed by Berger and Bouwman (2007). This study uses the quantile regression (QR) and the instrumental variables QR, along with classical ordinary least squares (OLS) and panel regression, to deal with the mixed results reported by previous papers.

Using OLS and panel regression, the authors first find that bank capital negatively affects liquidity creation which supports risk absorption hypothesis. Second, the result from QR confirms the negative association between the aforementioned variables and shows that the effect is homogenous across quantiles of liquidity creation distribution. The result remains unchanged when using the QR with instrumental variables to address the potential problem of endogeneity.

This paper sheds more lights on the relationship between bank capital and liquidity creation by using a novel estimation approach based on the QR methodology.

The purpose of this paper is to explore the relationship between bank regulatory capital and liquidity creation in banks of BIRCS countries.

Data from all publicly listed banks of BRICS nations for the period 2003-2014 have been collected and analyzed. Two-stage least-squares regression has been used to control endogeneity. The econometric model includes different control variables that have been selected based on the extant literature.

Increase in bank capital negatively affects bank liquidity creation which implies that “financial fragility-crowding out” hypothesis holds for banks of BRICS countries.

This study provides the evidence of the inverse relationship between bank regulatory capital and liquidity creation from emerging economies. The findings show that there is a trade-off between curtailing bank risk taking and liquidity creation. Therefore, the regulators must formulate policies to strike a balance between the two.

This study investigates the inter-relationships among liquidity creation, bank capital and credit risk in selected emerging economies between 2012 and 2016.

A three-step procedure as proposed by Berger and Bouwman (2009) is used to measure liquidity creation. Thereafter, a simultaneous equations model with the generalized method of moments (GMM) estimator is used to examine the links between liquidity creation, bank capital and credit risk.

The findings indicate that bank capital and credit risk affect each other positively after controlling for liquidity creation. Also, the findings show a negative impact of credit risk on liquidity creation while our findings do not find any evidence to confirm the reverse relationship between them. Furthermore, the findings demonstrate a two-way negative relationship between liquidity creation and bank capital in these emerging economies. Finally, the results indicate a positive relationship between capital and credit risk, especially in the case of small banks in the sample.

The findings suggest that the trade-off between the benefits of financial stability induced by tightening capital requirements and those of improved liquidity creation has crucial implications for policymakers and bank regulators in making the banking system more resilient. A positive impact of capital on credit risk emphasizes that the authorities in selected emerging economies should put more attention on small banks to ensure their exposures under target control.

This is the first study that examines the dynamic interrelationships among liquidity creation, bank capital and credit risk in the Asia–Pacific region.