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Stock market liquidity and bank stability

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  • Samarasinghe, Ama

Abstract

Motivated by the global liberalisation of financial systems, this paper is the first to explore the relation between aggregate stock market liquidity and bank stability. Using a cross-country sample, this paper documents a positive association between stock market liquidity and bank stability at both bank- and systemic- levels. The relevant economic channel is the diversification channel which suggests that as stock market liquidity increases, banks diversify into other non-traditional activities, thereby increasing their stability. These effects are more prominent in banks operating in countries with developed markets and further in banks operating in markets which provide higher levels of protection to market participants. These results have important policy and practical implications and are robust to several tests.

Suggested Citation

  • Samarasinghe, Ama, 2023. "Stock market liquidity and bank stability," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    • Handle: RePEc:eee:pacfin:v:79:y:2023:i:c:s0927538x2300094x
    DOI: 10.1016/j.pacfin.2023.102028
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    More about this item

    Keywords

    Stock market liquidity; Bank stability; Bank diversification; Financial institution interaction; Financial markets; Legal origin;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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