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Financial instability in Lebanon: Do the liquidity creation and performance of banks matter?

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  • Maroun, George
  • Fromentin, Vincent

Abstract

Our paper explores the existence and nature of an established relationship between the banks’ function as liquidity creators, their profitability, and the instability of the financial system in Lebanon. Using original, annual observations of Lebanese bank data for the period 1997 – 2019 and employing fixed effect OLS regressions and system GMM to account for the dynamic aspect of our data, we show that liquidity creation is significantly associated with lower financial stability and thus higher instability. Banks’ profitability is positively linked to their systemic stability. The results vary slightly from one estimate to another, but they stand up to robustness tests. Our empirical results have a substantial impact on banks’ control and regulatory approaches in Lebanon and similar developing countries, while contributing to a deeper understanding of systematic and broader financial instabilities in these countries.

Suggested Citation

  • Maroun, George & Fromentin, Vincent, 2024. "Financial instability in Lebanon: Do the liquidity creation and performance of banks matter?," The Quarterly Review of Economics and Finance, Elsevier, vol. 96(C).
    • Handle: RePEc:eee:quaeco:v:96:y:2024:i:c:s1062976924000644
    DOI: 10.1016/j.qref.2024.05.001
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    More about this item

    Keywords

    Bank liquidity; Creation Bank; Performance Bank stability; Financial crises Lebanon;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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