IDEAS home Printed from https://ideas.repec.org/a/ers/ijfirm/v12y2022i4p47-62.html
   My bibliography  Save this article

Recapitalization and Its Impact on Liquidity Position of Commercial Bank: Evidence from Nepal

Author

Listed:
  • Ananta Raj Kafe
  • Bidush Nepal
  • Anuj Acharya
  • Laxman Tandan

Abstract

Purpose: This paper intends to analyze the impact of recapitalization on liquidity position spanning 10 years of monthly time series data from commercial banks in Nepal from July 2012 to April 2022, including the 5 years preceding and following the recapitalization period. Design/Methodology/Approach: The paper examines the relationship between recapitalization and liquidity among commercial banks in Nepal using the Ordinary Least Squares method. The independent variable in the analysis is recapitalization, as measured by the growth in total capital of commercial banks, while the dependent variable is liquidity, as measured by the CD ratio. The study also controls for other factors, including the interest rate of loans, interbank rate, and growth in total assets of commercial banks, and includes a dummy variable for policy changes on capital and CD ratio. Findings: The results of this study demonstrate that recapitalization is positively associated with banks' risk-taking capacity and lending ability, and this relationship is supported by trends observed in Nepal. The study also finds that lending has increased in Nepal due to both the impact of recapitalization and the COVID-19 pandemic. Practical implications: This paper provides valuable insights for economic development, with findings on the impact of recapitalization on liquidity that can be used by banks, financial institutions, and regulators for policy-making and financial stability. Originality value: This research fills a gap in the existing literature by examining the impact of recapitalization on the liquidity of commercial banks, a topic that has not been previously explored in Nepal. It is necessary to investigate this relationship in order to understand how recapitalization affects liquidity.

Suggested Citation

  • Ananta Raj Kafe & Bidush Nepal & Anuj Acharya & Laxman Tandan, 2022. "Recapitalization and Its Impact on Liquidity Position of Commercial Bank: Evidence from Nepal," International Journal of Finance, Insurance and Risk Management, International Journal of Finance, Insurance and Risk Management, vol. 12(4), pages 47-62.
    • Handle: RePEc:ers:ijfirm:v:12:y:2022:i:4:p:47-62
    as

    Download full text from publisher

    File URL: https://journalfirm.com/journal/334/download
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. repec:oup:ecpoli:v:27:y:2012:i:72:p:603-646 is not listed on IDEAS
    2. Fungacova, Zuzana & Turk, Rima & Weill, Laurent, 2021. "High liquidity creation and bank failures," Journal of Financial Stability, Elsevier, vol. 57(C).
    3. Mike Mariathasan & Ouarda Merrouche, 2012. "Recapitalization, credit and liquidity [Liquidity and leverage]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 27(72), pages 603-646.
    4. Distinguin, Isabelle & Roulet, Caroline & Tarazi, Amine, 2013. "Bank regulatory capital and liquidity: Evidence from US and European publicly traded banks," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3295-3317.
    5. Allen, Franklin & Santomero, Anthony M., 1997. "The theory of financial intermediation," Journal of Banking & Finance, Elsevier, vol. 21(11-12), pages 1461-1485, December.
    6. Kane, Edward J. & Klingebiel, Daniela, 2004. "Alternatives to blanket guarantees for containing a systemic crisis," Journal of Financial Stability, Elsevier, vol. 1(1), pages 31-63, September.
    7. James B. Ang, 2008. "A Survey Of Recent Developments In The Literature Of Finance And Growth," Journal of Economic Surveys, Wiley Blackwell, vol. 22(3), pages 536-576, July.
    8. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
    9. Julian Franks & Oren Sussman, 2005. "Financial Distress and Bank Restructuring of Small to Medium Size UK Companies," Review of Finance, Springer, vol. 9(1), pages 65-96, March.
    10. Ang, James B. & McKibbin, Warwick J., 2007. "Financial liberalization, financial sector development and growth: Evidence from Malaysia," Journal of Development Economics, Elsevier, vol. 84(1), pages 215-233, September.
    11. Dubecq, Simon & Monfort, Alain & Renne, Jean-Paul & Roussellet, Guillaume, 2016. "Credit and liquidity in interbank rates: A quadratic approach," Journal of Banking & Finance, Elsevier, vol. 68(C), pages 29-46.
    12. Julian Franks & Oren Sussman, 2005. "Financial Distress and Bank Restructuring of Small to Medium Size UK Companies," Review of Finance, European Finance Association, vol. 9(1), pages 65-96.
    13. Philippe Jorion, 2000. "Risk management lessons from Long‐Term Capital Management," European Financial Management, European Financial Management Association, vol. 6(3), pages 277-300, September.
    14. Mr. Leslie E Teo & Mr. Charles Enoch & Mr. Carl-Johan Lindgren & Mr. Tomás J. T. Baliño & Ms. Anne Marie Gulde & Mr. Marc G Quintyn, 2000. "Financial Sector Crisis and Restructuring: Lessons from Asia: Lessons from Asia," IMF Occasional Papers 2000/003, International Monetary Fund.
    15. Thorsten Beck & Ian Webb, 2003. "Economic, Demographic, and Institutional Determinants of Life Insurance Consumption across Countries," The World Bank Economic Review, World Bank, vol. 17(1), pages 51-88, June.
    16. Davies, Richard & Richardson, Peter & Katinaite, Vaiva & Manning, Mark, 2010. "Evolution of the UK banking system," Bank of England Quarterly Bulletin, Bank of England, vol. 50(4), pages 321-332.
    17. Verma, Radheshyam & Herwadkar, Snehal, 2019. "Bank Recapitalisation and Credit Growth: The Indian Case," MPRA Paper 97394, University Library of Munich, Germany.
    18. Ebenezer Y. Akinkoye & Lukman .O. Oyelami, 2014. "Bank Recapitalization and Real Sector Performance: Empirical Evidence From Nigeria," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 3(1), pages 126-136, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ang, James B., 2013. "Are modern financial systems shaped by state antiquity?," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4038-4058.
    2. Seven, Unal & Coskun, Yener, 2016. "Does financial development reduce income inequality and poverty? Evidence from emerging countries," Emerging Markets Review, Elsevier, vol. 26(C), pages 34-63.
    3. Pradhan, Rudra P. & Arvin, Mak B. & Norman, Neville R., 2015. "Insurance development and the finance-growth nexus: Evidence from 34 OECD countries," Journal of Multinational Financial Management, Elsevier, vol. 31(C), pages 1-22.
    4. Zeeshan Atiq & M. Emranul Haque, 2015. "Financial Development and Economic Growth: The Role of Financial Liberalization," Centre for Growth and Business Cycle Research Discussion Paper Series 201, Economics, The University of Manchester.
    5. Jean-pierre Allegret & Sana Azzabi, 2013. "Financial development, threshold effects and convergence in developing and emerging countries," Economics Bulletin, AccessEcon, vol. 33(3), pages 1899-1921.
    6. Berger, Allen N. & Sedunov, John, 2017. "Bank liquidity creation and real economic output," Journal of Banking & Finance, Elsevier, vol. 81(C), pages 1-19.
    7. Balcilar, Mehmet & Gupta, Rangan & Lee, Chien-Chiang & Olasehinde-Williams, Godwin, 2018. "The synergistic effect of insurance and banking sector activities on economic growth in Africa," Economic Systems, Elsevier, vol. 42(4), pages 637-648.
    8. Pradhan, Rudra P. & Arvin, Mak B. & Bahmani, Sahar & Hall, John H. & Norman, Neville R., 2017. "Finance and growth: Evidence from the ARF countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 66(C), pages 136-148.
    9. Rudra P. Pradhan & Mak B. Arvin & John H. Hall & Sahar Bahmani, 2014. "Causal nexus between economic growth, banking sector development, stock market development, and other macroeconomic variables: The case of ASEAN countries," Review of Financial Economics, John Wiley & Sons, vol. 23(4), pages 155-173, November.
    10. Rousseau, Peter L. & D’Onofrio, Alexandra, 2013. "Monetization, Financial Development, and Growth: Time Series Evidence from 22 Countries in Sub-Saharan Africa," World Development, Elsevier, vol. 51(C), pages 132-153.
    11. Md Nain & Bandi Kamaiah, 2014. "Financial development and economic growth in India: some evidence from non-linear causality analysis," Economic Change and Restructuring, Springer, vol. 47(4), pages 299-319, November.
    12. Jakob B. MADSEN & James B. ANG, 2014. "Finance-Led Growth in the OECD since the 19th century: How Does Financial Development Transmit To Growth?," Economic Growth Centre Working Paper Series 1408, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.
    13. Sofie Balcaen & Sophie Manigart & Hubert Ooghe, 2011. "From distress to exit: determinants of the time to exit," Journal of Evolutionary Economics, Springer, vol. 21(3), pages 407-446, August.
    14. Ouyang, Yaofu & Li, Peng, 2018. "On the nexus of financial development, economic growth, and energy consumption in China: New perspective from a GMM panel VAR approach," Energy Economics, Elsevier, vol. 71(C), pages 238-252.
    15. Igor Filatotchev & Steve Toms, 2006. "Corporate Governance and Financial Constraints on Strategic Turnarounds," Journal of Management Studies, Wiley Blackwell, vol. 43(3), pages 407-433, May.
    16. Matthias Hartmann & Helmut Herwartz & Yabibal M. Walle, 2012. "Where enterprise leads, finance follows. In-sample and out-of-sample evidence on the causal relation between finance and growth," Economics Bulletin, AccessEcon, vol. 32(1), pages 871-882.
    17. Chung-Hua Shen & Chien-Chiang Lee & Shyh-Wei Chen & Zixiong Xie, 2011. "Roles played by financial development in economic growth: application of the flexible regression model," Empirical Economics, Springer, vol. 41(1), pages 103-125, August.
    18. John Armour, 2006. "Should we redistribute in insolvency," Working Papers wp319, Centre for Business Research, University of Cambridge.
    19. Rodano, Giacomo & Serrano-Velarde, Nicolas & Tarantino, Emanuele, 2016. "Bankruptcy law and bank financing," Journal of Financial Economics, Elsevier, vol. 120(2), pages 363-382.
    20. Andrew van Hulten & Michael Webber, 2010. "Do developing countries need 'good' institutions and policies and deep financial markets to benefit from capital account liberalization?," Journal of Economic Geography, Oxford University Press, vol. 10(2), pages 283-319, March.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ers:ijfirm:v:12:y:2022:i:4:p:47-62. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Marios Agiomavritis (email available below). General contact details of provider: https://journalfirm.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.