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Cash holdings and profitability of banks in developed and emerging markets

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  • Fernandes, Gláucia
  • Mendes, Layla dos Santos
  • Leite, Rodrigo de Oliveira

Abstract

We examine the effect of cash holdings on bank profitability using a worldwide database. Unlike previous studies, we model it as a non-monothonic relationship. We consider as a proxy for banks’ profitability the return on equity and the return on assets. Our results show that there is a non-monotonic relationship between the cash conversion cycle and bank profitability. Also, we show that banks in emerging markets (BRICS) hold more cash than banks in developed countries (G7). Moreover, our results reveal an increase in the banks’ cash holdings after the 2008 financial crisis.

Suggested Citation

  • Fernandes, Gláucia & Mendes, Layla dos Santos & Leite, Rodrigo de Oliveira, 2021. "Cash holdings and profitability of banks in developed and emerging markets," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 880-895.
    • Handle: RePEc:eee:reveco:v:71:y:2021:i:c:p:880-895
    DOI: 10.1016/j.iref.2020.10.018
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    More about this item

    Keywords

    Cash holdings; Bank profitability; Inverted U-Shaped relation; G7; BRICS;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • F30 - International Economics - - International Finance - - - General
    • 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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