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Article
Publication date: 1 February 2002

GEORGE L. YE

Liquidity risk, i.e., the likelihood that a swap can be “sold” (i.e., assigned) may affect swap prices. This article addresses the importance of liquidity risk as a factor…

Abstract

Liquidity risk, i.e., the likelihood that a swap can be “sold” (i.e., assigned) may affect swap prices. This article addresses the importance of liquidity risk as a factor in the valuation of swaps, which are subject to default risk. The author presents a model for pricing these swaps by incorporating a proxy for liquidity risk. Using the model, the author finds that the effects of liquidity risk may partially offset the effects of default risk.

Details

The Journal of Risk Finance, vol. 3 no. 3
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 24 October 2021

Emmanuel Carsamer, Anthony Abbam and Yaw N. Queku

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…

Abstract

Purpose

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.

Design/methodology/approach

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.

Findings

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).

Research limitations/implications

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.

Practical implications

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

Originality/value

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.

Details

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

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Article
Publication date: 26 May 2021

Carla Henriques and Elisabete Neves

This paper aims to explore the trade-off between liquidity, risk and return under sectoral diversification across distinct economic settings and investment strategies.

Abstract

Purpose

This paper aims to explore the trade-off between liquidity, risk and return under sectoral diversification across distinct economic settings and investment strategies.

Design/methodology/approach

A novel multi-objective portfolio model is proposed to assess investment decisions under sectoral diversification, where the objective functions and constraints are interval-valued. The objective functions used are risk minimization (through the semi-absolute deviation measure of risk), maximization of liquidity (using turnover as a proxy) and the maximization of logarithmic return. Besides coherence constraints (imposing that the sum of the percentages of investment assigned to each stock should be equal to 100%), constraints regarding the maximum proportion of capital that can be invested (ensuring a minimum level of diversification) and cardinality constraints (to account for transaction costs) are also imposed.

Findings

Besides the trade-off between return and risk, the study findings highlight a trade-off between liquidity and return and a positive relationship between risk and liquidity. Under an economic crisis scenario, the trade-off between return and liquidity is reduced. With the economic recovery, the levels of risk increase when contrasted with the setting of the economic crisis. The highest liquidity levels are reached with the economic boom, whereas the highest returns are obtained with the economic recession.

Originality/value

This paper suggests a new modeling approach for assessing the trade-offs between liquidity, risk and return under different scenarios and investment strategies. A new interactive procedure inspired on the reference point approach is also proposed to obtain possibly efficient portfolios according to the investor's preferences. Regarding previous approaches suggested in the literature, this new procedure allows obtaining both supported and unsupported efficient solutions when cardinality constraints are included.

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Details

The Banking Sector Under Financial Stability
Type: Book
ISBN: 978-1-78769-681-5

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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

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Article
Publication date: 16 November 2020

Ameni Ghenimi, Hasna Chaibi and Mohamed Ali Brahim Omri

This paper aims to identify and analyze the similarities and differences of the liquidity risk determinants within conventional and Islamic banks.

Abstract

Purpose

This paper aims to identify and analyze the similarities and differences of the liquidity risk determinants within conventional and Islamic banks.

Design/methodology/approach

This study uses a dynamic panel data approach to examine the relationship between liquidity risk and a set of bank-specific and macroeconomic factors during 2005–2015, by selecting 27 Islamic banks and 49 conventional ones operating in the MENA region. More specifically, the dynamic two-step generalized method of moment estimator technique introduced by Arellano and Bond (1991) is applied.

Findings

The results suggest that the set of bank-specific variables influences the liquidity risk of both banking systems, while macroeconomic factors determine the liquidity risk of conventional banks. Islamic banks are not affected by macroeconomic determinants.

Practical implications

The research facilitates to the academicians, practitioners and bankers to have an alluded picture about liquidity risk determinants and their management. The findings can be used by bankers’ policy decision-makers to improve and enhance their consideration for liquidity risk management in both banking systems. Indeed, the study makes them aware to manage liquidity risk differently between conventional and Islamic banks, as the results reveal different liquidity risk determinants.

Originality/value

Compared to the abundant studies on the determinants of credit risk, researchers have not sufficiently addressed the factors influencing liquidity risk. Moreover, none of these few research studies has discussed and compared liquidity risk determinants within both banking systems operating in the Middle East and North Africa (MENA) region. This leads us to identify the similarities and differences between conventional and Islamic banks in the MENA region in respect of systematic and unsystematic determinants of the liquidity risk. The value is attributed to the increasing differentiation between Islamic and conventional banks. Islamic banks are characterized with a different liquidity structure distinguishing them from their conventional counterparts.

Details

International Journal of Law and Management, vol. 63 no. 1
Type: Research Article
ISSN: 1754-243X

Keywords

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Article
Publication date: 4 May 2012

Ahmed Arif and Ahmed Nauman Anees

The purpose of this paper is to examine liquidity risk in Pakistani banks and evaluate the effect on banks' profitability.

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14324

Abstract

Purpose

The purpose of this paper is to examine liquidity risk in Pakistani banks and evaluate the effect on banks' profitability.

Design/methodology/approach

Data are retrieved from the balance sheets, income statements and notes of 22 Pakistani banks during 2004‐2009. Multiple regressions are applied to assess the impact of liquidity risk on banks' profitability.

Findings

The results of multiple regressions show that liquidity risk affects bank profitability significantly, with liquidity gap and non‐performing as the two factors exacerbating the liquidity risk. They have a negative relationship with profitability.

Research limitations/implications

The period studied in this paper is 2004‐2009, due to availability of the data. However, the sample period does not impair the findings since the sample includes 22 banks, which constitute the main part of the Pakistani banking system. Moreover, only profitability is used as the measure of performance. Economic factors contributing to liquidity risk are not covered in this paper.

Originality/value

This is the first paper addressing the liquidity risk faced by the Pakistani banking system. Past researchers and practitioners have not given the proper attention to liquidity risk. This paper helps in understanding the factors of liquidity risk and their impact on the profitability of the banking system. The authors emphasise contemporary risk managers to mitigate liquidity risk by having sufficient cash resources. This will reduce the liquidity gap, thereby reducing the dependence on repo market.

Details

Journal of Financial Regulation and Compliance, vol. 20 no. 2
Type: Research Article
ISSN: 1358-1988

Keywords

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Article
Publication date: 13 February 2017

Nevine Sobhy Abdel Megeid

This research aims to analyze and compare the effectiveness of liquidity risk management of Islamic and conventional banking in Egypt to ascertain which of the two banking…

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3759

Abstract

Purpose

This research aims to analyze and compare the effectiveness of liquidity risk management of Islamic and conventional banking in Egypt to ascertain which of the two banking systems are performing better.

Design/methodology/approach

A sample of six conventional banks (CBs) and two Islamic banks (IBs) in Egypt was selected. Using the liquidity ratios, the investigation involves analyzing the financial statements for the period of 2004-2011. The data were obtained from Bank scope database.

Findings

The research found that in Egypt, CBs perform better in terms of liquidity risk management than IBs. The liquidity risk management significant differences between IBs and CBs could be attributed more cash availability to CBs than to IBs, in addition, Egyptian Central Bank regulations on capital and liquidity requirements for IBs disconcert IBs’ performance.

Practical implications

This research facilitates the bankers, academician, scholars and bankers to have an alluded picture about Egyptian banking developments in liquidity risk management. The results can be used by bankers’ policy decision-makers to improve and enhance their consideration for liquidity risk management.

Originality/value

This research covers a period and a country that compares CBs’ and IBs’ liquidity risk management. Its value is attributed to the increasing differentiation between CBs and IBs.

Details

Journal of Islamic Accounting and Business Research, vol. 8 no. 1
Type: Research Article
ISSN: 1759-0817

Keywords

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Article
Publication date: 14 October 2019

Suzanna ElMassah, Ola AlSayed and Shereen Mostafa Bacheer

The purpose of this study is to investigate the main factors that affect liquidity risk in the UAE Islamic banks.

Abstract

Purpose

The purpose of this study is to investigate the main factors that affect liquidity risk in the UAE Islamic banks.

Design/methodology/approach

The study examines the annual data of the seven UAE Islamic banks over the period 2008-2014. Random effects panel data model is used to estimate the impact of four bank-specific variables and two macroeconomic ones on the liquidity risk of the UAE Islamic banks via their impact on five alternative liquidity ratios.

Findings

The paper finds that bank size has a negative impact on liquidity risk according to two liquidity ratios only, and an insignificant impact according to the other three. Both capital adequacy and London interbank offered rate have significant negative impacts on liquidity risk for three liquidity ratios, and insignificant impacts on two. The effect of credit risk is negative for all adopted ratios, while that of return on assets is negative for one ratio only. Finally, real GDP has a positive effect on two ratios and an insignificant one on the others.

Research limitations/implications

The study provides insights for policymakers and practitioners to choose appropriate liquidity management procedures. It emphasizes that identifying efficient procedures or policies depends on the liquidity ratio that is used as a proxy of liquidity risk and its definition, in addition to the correlation between the liquidity ratio and liquidity risk. The study also provides some guidance to Islamic banks in the UAE concerning the main factors impacting their liquidity, which can eventually enable them to support their liquidity management policies, in a way that would expand their customer base according to profitability aspects, and not only religious ones.

Originality/value

The paper adds to the relatively limited literature on liquidity risk in Islamic banks. It also is the first study that investigates the determinants of liquidity risk facing Islamic banks in the UAE using five alternative liquidity ratios.

Details

Journal of Islamic Accounting and Business Research, vol. 10 no. 5
Type: Research Article
ISSN: 1759-0817

Keywords

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Article
Publication date: 15 January 2018

Ahmed Mohamed Dahir, Fauziah Binti Mahat and Noor Azman Bin Ali

The purpose of this paper is to examine the effects of funding liquidity risk and liquidity risk on the bank risk-taking.

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1303

Abstract

Purpose

The purpose of this paper is to examine the effects of funding liquidity risk and liquidity risk on the bank risk-taking.

Design/methodology/approach

This study employs a system generalized method of moments (GMM) estimation technique and a sample of 57 banks operating in BRICS countries over the period from 2006 to 2015.

Findings

The results reveal that liquidity risk has a significant and negative effect on the bank risk-taking, indicating that a decrease in liquidity risk contributes to higher bank risk-taking. The study also reveals that funding liquidity risk has the substantial impact on bank risk-taking, suggesting lower funding liquidity risk results in higher bank risk-taking. These results are consistent with prior assumptions.

Research limitations/implications

The implications of this study highlight the fact that liquidity risk is a risk factor which drives the potential bank default, of which banks tend to take more risks when higher funding liquidity exists.

Practical implications

This study offers a number of valuable implications for the policy makers as well as practitioners. The policy makers should take into account better liquidity risk management framework aimed at preventing banks from taking excessive risks. Bank executives must pay more attention on how banks could hold more liquid securities and cash. Less risk-taking reduces higher borrowing costs undermining earnings through imposing taxes on corporate.

Originality/value

This work uncovered that liquidity risk per se is an important and previously unidentified risk factor, specifically its effects on bank risk-taking and contributes to the view in support of holding more liquid securities than the past.

Details

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

Keywords

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