Liquidity creation and banking stability: an approach using the Bayes method

This research used the Bayesian method and Gibbs sampling algorithm on an unbalanced database and examined the impacts of the liquidity creation (LC) on the financial stability (FS) of the banks in Southeast Asian countries from 2007 to 2021. With both ‘Cat Fat’ and ‘Cat Nonfat’ method, the study results point out that LC has a positive impact on the BS within the ASEAN by enhancing the stability level of banks in these countries. The study findings of the impact of liquidity creation (LC) on banking stability (BS) within the Association of Southeast Asian Nations (ASEAN) are critically important because they provide profound implications for regulators and bank managers in determining LC behavior in emerging markets. These outcomes are particularly relevant to liquidity regulations as per Basel III standards. As such, assets with more liquidity are to be held while loans and deposits with illiquidity might cause unexpected effects when LC is reduced. More importantly, this article also contributes empirical results on the relationship between LC and BS. This is the first study to examine the correlation between LC and financial stability of Southeast Asian banks.The study findings of the impact of liquidity creation (LC) on banking stability (BS) within the Association of Southeast Asian Nations (ASEAN) are critically important because they provide profound implications for regulators and bank managers in determining LC behavior in emerging markets. These outcomes are particularly relevant to liquidity regulations as per Basel III standards. As such, assets with more liquidity are to be held while loans and deposits with illiquidity might cause unexpected effects when LC is reduced. More importantly, this article also contributes empirical results on the relationship between LC and BS.Originality/value: This is the first study to examine the correlation between LC and financial stability of Southeast Asian banks.