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Article
Publication date: 23 August 2013

Byeongyong Paul Choi, Jin Park and Chia‐Ling Ho

The purpose of this study is two‐fold. The first purpose is to properly measure the level of US property and liability (P/L) insurers liquidity creation, applying the liquidity…

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Abstract

Purpose

The purpose of this study is two‐fold. The first purpose is to properly measure the level of US property and liability (P/L) insurers liquidity creation, applying the liquidity creation measure developed by Berger and Bouwman. The second purpose is to identify factors affecting P/L insurers' liquidity creation using a regression. Particularly, this paper tests two competing hypotheses regarding the relationship between the level of capital and liquidity creation.

Design/methodology/approach

The paper calculates liquidity creation for the US P/L insurers. First, the paper categorizes all items in assets, liabilities and surplus into liquid, semi‐liquid, or illiquid. This process is based on the ease, cost, and time for insurers to meet their contractual obligation to obtain liquid funds or to pay off their liability. The paper also constructs the regression model to test the impact of insurers' surplus level on liquidity creation while controlling for the firm‐specific variables. The paper examines this relationship for the time period between 1998 and 2007.

Findings

Contrary to the study of depository institutions, the paper reports that P/L insurers are liquidity destroyers than liquidity creators. This paper also provides that liquidity destruction varies over time and differs among insurers in different size. The total amount of liquidity destruction ranges from 47 to 58 percent of insurer total asset. In addition, the results of a regression show that insurer capital is negatively related to the level of liquidity creation. This provides implications that insurers with lower level of capital face more regulatory requirements and are forced to meet liquidity demand more.

Practical implications

The level of liquidity creation and the trend of liquidity creation of P/L insurers are of particular interest to regulators and consumers because the level of liquidity creation as shown during the financial crisis has a significant adverse impact on the financial intermediaries.

Originality/value

The paper do not aware of any study that attempts to measure liquidity creation by insurers and its relationship with both organizational and financial characteristics. The paper reports that P/L insurers are, unlike depository institutions, liquidity destroyers. Whether or not P/L insurers create/destroy liquidity is an interesting economic question to shed light on the roles of P/L insurers as a financial intermediary.

Details

Managerial Finance, vol. 39 no. 10
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 11 July 2016

Byeongyong Paul Choi, Jin Park and Chia-Ling Ho

The purpose of this paper is twofold: first, this paper measures how much liquidity is transformed by the US life insurance industry for the sample period; and Second, this study…

Abstract

Purpose

The purpose of this paper is twofold: first, this paper measures how much liquidity is transformed by the US life insurance industry for the sample period; and Second, this study tests the “risk absorption” hypothesis and “financial fragility-crowding out” hypothesis to identify the impact of capital on liquidity creation in the US life insurance industry. In addition, a regression model is conducted to explore the relationship between liquidity creation and other firm characteristics.

Design/methodology/approach

In order to construct the liquidity creation measures, all assets and liabilities are classified as liquid, semi-liquid, or illiquid with appropriate weights to these classifications, which will then be combined to measure the amount of liquidity creation. In addition, a regression model is analyzed. The level of insurers’ liquidity creation is regressed on the capital ratio (surplus over total assets) and other financial and organizational variables to test two prevailing hypotheses.

Findings

This paper finds that the US life insurers de-create liquidity. The authors provide that the amount of liquidity de-creation is related to the size of insurers such that liquidity de-creation has increased as assets grow and that large insurers de-create most of liquidity. The US life insurance industry de-created $2.1 trillion in liquidity, i.e., 43 percent of total industry assets, in 2008. The empirical results support the “financial fragility-crowding out” hypothesis. Life insurers’ liquidity de-creation is mainly caused by the large portion of liquid assets, which is required by regulation and capital is not a main factor of liquidity de-creation.

Originality/value

There is no known study on the issue of liquidity creation by life insurers. Thus, the extent of liquidity creation by the life insurance industry, if any, is an empirical matter to investigate, but also an important matter to regulators and the academia since the products and business operations (e.g. asset portfolio and asset and liability management) of life insurers are different from those of property and liability insurers.

Details

Managerial Finance, vol. 42 no. 7
Type: Research Article
ISSN: 0307-4358

Keywords

Abstract

Details

Tools and Techniques for Financial Stability Analysis
Type: Book
ISBN: 978-1-78756-846-4

Article
Publication date: 19 June 2018

Tu Le

The purpose of this paper is to investigate the interrelationship between liquidity creation (LC) and bank capital in Vietnamese banking between 2007 and 2015.

Abstract

Purpose

The purpose of this paper is to investigate the interrelationship between liquidity creation (LC) and bank capital in Vietnamese banking between 2007 and 2015.

Design/methodology/approach

A three-step procedure is used to measure LC. Thereafter, a simultaneous equations model with a three-stage least squares estimator is employed to examine the links between LC and bank capital.

Findings

The findings show that large banks mainly contributed a strong growth in LC in Vietnam between 2007 and 2015. The findings also indicate that off-balance sheet activities only played a small role in LC. In addition, the findings indicate a negative two-way relationship between LC and bank capital in Vietnam. The results of the robust checks reinforce the main findings.

Practical implications

The evidence shows that the implementation of Basel III may reduce LC and greater LC may increase banks’ insolvency. Consequently, this trade-off between the benefits of financial stability induced by tightening capital requirements and those of enhanced LC has important implications for Vietnamese authorities in strengthening the banking system.

Originality/value

This study is the first attempt to investigate the interrelationship between LC and bank capital in Vietnam, in which fat liquidity creation and non-fat liquidity creation are used and alternative measures of LC are also employed to provide robustness to the main findings.

Details

Managerial Finance, vol. 45 no. 2
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 19 February 2021

Naina Grover and Pankaj Sinha

The purpose of this paper is to explore the micro and macro factors affecting liquidity creation by scheduled commercial banks (excluding Regional Rural Bank) in India from 2005…

Abstract

Purpose

The purpose of this paper is to explore the micro and macro factors affecting liquidity creation by scheduled commercial banks (excluding Regional Rural Bank) in India from 2005 to 2018.

Design/methodology/approach

Two measures of liquidity creation, the broad and narrow measures, are constructed using RBI data available on Indian banks. System generalized method of moments has been applied to explore the factors affecting liquidity creation.

Findings

This study finds high level of persistence in liquidity creation in banks. Variation in the broad measure is explained by equity ratio, market share, GDP, gross savings and lending rate, whereas the narrow measure is explained by equity ratio, market share, size and lending rate. The Global Financial Crisis had a negative effect on liquidity creation as per both the measures, and the impact was more severe for the broad measure as compared to the narrow measure.

Research limitations/implications

This study finds a positive correlation between bank value and liquidity creation which suggests that the investors favourably evaluate banks that create more liquidity. This study is confined to India only.

Practical implications

There is a negative influence of capital on liquidity created by banks, which implies a trade-off that exists between financial stability and liquidity creation. Basel III norms impose higher capital and liquidity standards which will have negative implications for liquidity creation.

Originality/value

To the best of authors’ knowledge, this is the first study in the Indian context that focusses on factors affecting liquidity creation in a dynamic framework and determines the relationship between liquidity creation and market value of a bank.

Details

Journal of Asia Business Studies, vol. 15 no. 2
Type: Research Article
ISSN: 1558-7894

Keywords

Book part
Publication date: 1 October 2015

Bill B. Francis, Iftekhar Hasan and Eric Ofori

This paper investigates the impact of the development of capital markets on economic growth in Africa and reports a significant increase in real GDP per capita after stock…

Abstract

This paper investigates the impact of the development of capital markets on economic growth in Africa and reports a significant increase in real GDP per capita after stock exchanges are established. This paper also reveals that there are significant improvements in the level of private investments in the post stock market launch era. The results also indicate that stock markets play a complementary role to the banking sector by contributing to the availability of private credit. Although African capital markets are relatively less advanced when compared to capital markets on other continents (particularly in terms of technology, structure, and liquidity), we find that their establishment has been crucial in helping African countries catch up with the rest of the world.

Details

International Corporate Governance
Type: Book
ISBN: 978-1-78560-355-6

Keywords

Article
Publication date: 13 October 2021

Anas Alaoui Mdaghri and Lahsen Oubdi

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…

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.

Details

Journal of Financial Regulation and Compliance, vol. 30 no. 2
Type: Research Article
ISSN: 1358-1988

Keywords

Open Access
Article
Publication date: 16 August 2022

Tran Thai Ha Nguyen, Gia Quyen Phan, Wing-Keung Wong and Massoud Moslehpour

This research examines the relationship between market power and liquidity creation in the specific context of bank profitability in the Vietnamese banking sector.

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Abstract

Purpose

This research examines the relationship between market power and liquidity creation in the specific context of bank profitability in the Vietnamese banking sector.

Design/methodology/approach

The study applies the methodology proposed by Berger and Bouwman (2009) to demonstrate the creation of bank liquidity through a three-step procedure for investigating the relationship between market power and liquidity creation. The three steps include non-fat liquidity (NFLC), fat liquidity (FLC) and system generalized method of moments estimation for panel data.

Findings

This study finds that liquidity creation increases when a bank has high market power. Further, highly profitable banks positively impact the market power of banks with regard to liquidity creation, relative to less profitable banks. Moreover, bank size, capital, economic growth and interest rate negatively influence bank liquidity creation, while credit risk positively relates to bank liquidity creation.

Research limitations/implications

Measurements used in this study are based on the works of Berger and Bouwman (2009). There are specific variations, relative to Basel III. In addition, other variables significantly impact bank liquidity creation that have not been considered in the models, and a quadratic model should have been considered to measure market power and bank liquidity creation.

Practical implications

This study suggests that managers should control the liquidity of their banks by supervising vulnerable characteristics that have been mentioned herein and emphasizing improvements in profitability. Further, the government may consider encouraging banks to generate more liquidity by modifying regulations concerned with market power or reinforcing policies about improving the transparent business environment.

Originality/value

This study characterizes an attempt to examine the influence of market power on the liquidity creation of banks in Vietnam, which represents one of the most dynamic systems in Asia, with several varied participating banks. The current study also examines the same within the specific context of the modifying impact of the profitability of banks.

Details

Journal of Asian Business and Economic Studies, vol. 30 no. 3
Type: Research Article
ISSN: 2515-964X

Keywords

Article
Publication date: 25 March 2021

Tu D.Q. Le and Xuan T.T. Pham

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

Abstract

Purpose

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

Design/methodology/approach

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.

Findings

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.

Practical implications

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.

Originality/value

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

Details

Managerial Finance, vol. 47 no. 8
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 15 January 2018

Muhammad Umar, Gang Sun, Khurram Shahzad and Zia-ur-Rehman Rao

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

Abstract

Purpose

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

Design/methodology/approach

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.

Findings

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

Originality/value

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.

Details

International Journal of Emerging Markets, vol. 13 no. 1
Type: Research Article
ISSN: 1746-8809

Keywords

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