Basel III liquidity regulatory framework and bank liquidity creation in MENA countries
| DOI | https://doi.org/10.1108/JFRC-01-2021-0002 |
| Published date | 13 October 2021 |
| Date | 13 October 2021 |
| Pages | 129-148 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation |
| Author | Anas Alaoui Mdaghri,Lahsen Oubdi |
Basel III liquidity regulatory
framework and bank liquidity
creation in MENA countries
Anas Alaoui Mdaghri and Lahsen Oubdi
National School of Business and Management (ENCG), Ibn Zohr University,
Agadir, Morocco
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 (L CR), 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 Easternand North African (MENA) countries from 2009 to 2017.
Findings –The results show thatthe 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 analysisof large and small bank sub-samples uncovered results similar to the
overall MENAsample.
Research limitations/implications –The findings raise interestingpolicy implications and suggest a
trade-off betweenthe benefits of the financial resiliency induced by implementing liquidity requirementsand
the creationof liquidityessential 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 empiricalevidence on the effect
of both the NSFR and LCR regulatory liquidity standards on bank liquidity creation in the MENA
region.
Keywords Basel III, Liquidity regulatory framework, Bank liquidity creation, MENA region
Paper type Research paper
Introduction
Liquidity is recognizedas one of the major triggers of the last global financialcrisis of 2007–
2009 (Ippolito et al., 2016). The previousversion of the Basel accords neglected the liquidity
risk aspect; this limitation garnered widespread criticism. In response, the Basel Committee
on Banking Supervision (BCBS) drafted a new regulatory framework, Basel III, to improve
financial stability and bank liquidity (BCBS, 2010a,2010b,2014). In addition to
strengthening capitaladequacy standards and implementing a regulatory leverage ratio, the
BCBS developed a new liquidity framework by establishing short-term and long-term
liquidity requirements expected to help banks withstand potential liquidity shocks. First,
the Liquidity Coverage Ratio (LCR) requires banks to keep high-quality liquid assets
(HQLA) (e.g. cash, central bank reserves, government securities) tocover liquidity outflows
over a period of 30days. Second, the Net Stable Funding Ratio (NSFR) is designed toreduce
JEL classification –G21, G28
Basel III and
bank liquidity
creation
129
Received7 January 2021
Revised7 June 2021
7August2021
Accepted20 September 2021
Journalof Financial Regulation
andCompliance
Vol.30 No. 2, 2022
pp. 129-148
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-01-2021-0002
The current issue and full text archive of this journal is available on Emerald Insight at:
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banks’liquidity mismatches by ensuring banks hold enough stable funds on the liabilities
side to finance their long-termassets over one year.
To meet Basel III liquidity requirements, banks would have to restructure their balance
sheets to improve the stability of their liabilities and the liquidity of their assets (Mordel,
2018). Consequently, banks will need to hold more liquid assets at the expense of illiquid
assets (e.g. commercial loans), impacting their essential role as liquidity providers for the
economy (Berger and Bouwman,2009).
The Middle East and North Africa (MENA) economic region is predominantly a bank-
based economy, as banks playa crucial role in financing economic activities. Banks hold the
majority of financial assets (Ben Naceur and Omran, 2011). However, the MENA region
banking sector has evolved differently in each constituent country. The Gulf Cooperation
Council, Morocco, Tunisia, Lebanon and Jordan have enacted reforms and regulations
favoring privatization;other countries’banking sectors, such as Algeria and Egypt, struggle
to develop due to the dominance of state banks and government regulation of banks’
strategies. MENA countries have committed to implementing the Basel III regulatory
framework: almost all MENAcountries have fully implemented the framework while others
have introduced or phased in the liquidity framework[1](AMF, 2018). Given the severityof
previous financial crises and the unpredictablenature of future crises, the adoption of Basel
III by MENA banks will likely bolster the banking sector’s resilience in this region.
Moreover, while Basel III generates additional costs for MENA banks, including the
economic cost born by its effect on the credit supply, this new regulation improves the
transparency of the MENA banking sector. Thus, enhanced resilience and transparency
render these countries attractive to foreigninvestors and reduce country risk premia (Gray
et al.,2013).
The literature on regulatory capital and its effect on bank liquidity creation has been
extensively studied (Berger and Bouwman, 2009;Casu et al., 2018;Fu et al., 2015;Horv
ath
et al.,2014;Lei and Song, 2013;Umar et al.,2017). Yet, the debate on liquidity regulationis
much less advanced (Allen, 2014;DeYoung and Jang, 2016;Diamond and Kashyap, 2016).
This paper addresses the gap in existing banking literature by empirically examining the
impact of new liquidity regulatory standards, namely, NSFR and LCR, on bank liquidity
creation. To our knowledge, no empirical study has attempted to investigate the
implications of both liquidity regulations, despite the significance of their potential impact
on banks as liquidity providers that finance the economy. Moreover, as most MENA
countries have fully implemented the new Basel III regulatory liquidity ratios, we aim to
discover how this implementation will eventually affect bank liquidity creation in these
countries. Finally, as MENA financial systems are bank-based, we plan to characterize the
crucial role banks play in financing variouseconomic sectors. A reduction in bank liquidity
creation due to stringentliquidity regulations may restrict economic investmentactivity and
impede economic growthin this region.
The major contributions of this empirical study are twofold as follows: first, it aims to
estimate the NSFR and LCR and bankliquidity creation based on publicly available on- and
off-balance sheet data of 129 commercialbanks operating in 10 MENA countries from 2009
to 2017. Second, this research develops a multivariate dynamic panel data model to
investigate the impact of the BaselIII liquidity framework on bank liquidity creation using
Quasi-Maximum Likelihood (QML) estimation. While we used the two-difference system
Generalized Method of Moments (GMM) and random effects model for further robustness
tests.
The remainder of the study is organizedas follows: Section 2 presents a literature review
on bank liquidity creation and the Basel III liquidity framework. Section 3 introduces the
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