Interaction among funding liquidity, liquidity creation and stock liquidity of banks. Evidence from BRICS countries
| Pages | 430-452 |
| Date | 14 November 2016 |
| DOI | https://doi.org/10.1108/JFRC-11-2015-0062 |
| Published date | 14 November 2016 |
| Author | Muhammad Umar,Gang Sun |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation |
Interaction among funding
liquidity, liquidity creation and
stock liquidity of banks
Evidence from BRICS countries
Muhammad Umar
School of Finance, Dongbei University of Finance & Economics, Dalian,
China, and Department of Management,
COMSATS Institute of Information Technology,
Vehari, Pakistan, and
Gang Sun
School of Finance, Dongbei University of Finance & Economics,
Dalian, China
Abstract
Purpose – This study aims to explore the relationship between three different kinds of bank liquidity:
funding liquidity; liquidity creation; and stock liquidity.
Design/methodology/approach – It used the data from listed banks of BRICS countries spanning
the period 2007-2014. Simultaneous equations model and three-stage least square estimation were used
for analysis.
Findings – First of all, increase in liquidity creation is linked to decline in funding liquidity, but
variation in funding liquidity does not describe changes in liquidity creation. Second, higher stock
illiquidity is associated with greater liquidity creation, but liquidity creation does not determine
variation in stock liquidity. Lastly, there is no direct relationship between funding liquidity and stock
liquidity; however, stock liquidity indirectly affects funding liquidity through liquidity creation.
Practical implications – The ndings highlight the fact that capital is not the only determinant of
liquidity creation, rather stock liquidity is an equally important determinant in the case of listed banks
of BRICS countries. This fact has been highlighted by the recent nancial crisis. Furthermore, funding
liquidity depends on liquidity creation which depends on stock liquidity. However, the stock liquidity of
banks neither depends on liquidity creation nor funding liquidity.
Originality/value – To the best of the authors’ knowledge, this study is the rst one to provide the
empirical evidence for the relationship between three different kinds of bank liquidity.
Keywords Banks, BRICS countries, Liquidity creation, Stock liquidity, Funding liquidity
Paper type Research paper
1. Introduction
Banks play a very important role in the economic development of emerging countries. They
transfer funds from surplus economic units to the economic units which have opportunities
but lack funds. They create liquidity through this process of risk transformation. To obtain
funds from depositors, banks have to ensure them that they will get their money back
JEL classication – G21, G15
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1358-1988.htm
JFRC
24,4
430
Journalof Financial Regulation
andCompliance
Vol.24 No. 4, 2016
pp.430-452
©Emerald Group Publishing Limited
1358-1988
DOI 10.1108/JFRC-11-2015-0062
according to the agreement. This ability of the bank to repay its liabilities when they come
due is known as funding liquidity. The stock liquidity of the bank depends on its
performance which ultimately depends on liquidity creation and funding liquidity. The ease
with which an asset can be bought or sold without a signicant change in its price is known
as the stock liquidity.
Many studies have been conducted regarding bank liquidity, but most of them explore
only one type of liquidity. Most of the studies regarding funding liquidity are theoretical in
nature, and only a few provide the empirical evidence (Diamond and Dybvig, 1983;Strahan,
2008;Zhang et al., 2013;Drehmann and Nikolaou, 2013;Bonner et al., 2015;Fall and Viviani,
2015). Several of the recent studies regarding liquidity creation measure the amount of
liquidity created by banks and investigate its relationship with capital (Deep and Schaefer,
2004;Berger and Bouwman, 2009;Hackethal et al., 2010;Loutskina, 2011;Lei and Song,
2013;Horvath et al., 2014). There are numerous studies regarding stock liquidity, but most of
them analyze the stock liquidity of non-nancial rms (Chordia et al., 2000;Stange and
Kaserer, 2008;Udomsirikul et al., 2011;Chatterjee, 2015). The studies which explore the
relationship between two or three different kinds of bank liquidity are rare (Brunnermeier
and Pedersen, 2009;Nikolaou, 2009).
This study bridges the gaps in existing literature in many ways. First of all, it eliminates
the confusion regarding the concept of bank liquidity by discussing three different kinds of
bank liquidity separately. Second, it extends literature to a new dimension by providing
empirical evidence regarding the relationship between three different kinds of bank
liquidity. Third, it studies liquidity of banks from emerging economies. A lot of research has
been conducted regarding bank liquidity of developed countries, but studies regarding
developing countries are few. This study is based on banks of Brazil, Russia, India, China
and South Africa, commonly known as BRICS countries, because the banks in these
countries fulll most of the credit demand compared with nancial markets, which play a
stronger role of nancial intermediation in developed countries. Another reason to study the
bank liquidity of these nations is that their economies are in transition and they are expected
economic powers of future. Fourth, the ndings suggest that in the case of publicly traded
banks, capital is not the only factor which affects liquidity creation rather uctuations in
stock liquidity also affects liquidity creation, which ultimately affect funding liquidity. Fifth,
it shows that there is a chain of reaction from stock liquidity to liquidity creation to funding
liquidity. Lastly, it guides us that in case of emerging nations, stock liquidity of banks is
independent of other two types of liquidity.
Rest of the paper is as follow. Section 2 describes relevant existing literature.
Methodology and regression framework is explained in Section 3. Section 4 reports results,
and Section 5 contains the conclusion.
2. Literature review
Our research relates three different strands of literature:
(1) the theories which focus on funding liquidity;
(2) studies regarding calculation of liquidity creation and exploring its relationship
with capital; and
(3) theories related to stock liquidity.
Some of the most relevant studies have been discussed below.
431
Funding
liquidity
To continue reading
Request your trial