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Bank Diversification, Competition And Liquidity Creation: Evidence From Malaysian Banks

Author

Listed:
  • MOAU YONG TOH

    (Department of Finance, Business School, Changzhou University, 21 Gehu Middle Road, Wujin, Changzhou, Jiangsu, P. R. China)

  • CHRISTOPHER GAN

    (#x2020;Department of Financial and Business Systems, Faculty of Agribusiness and Commerce, Lincoln University, Lincoln 7647, Christchurch, New Zealand)

  • ZHAOHUA LI

    (#x2020;Department of Financial and Business Systems, Faculty of Agribusiness and Commerce, Lincoln University, Lincoln 7647, Christchurch, New Zealand)

Abstract

This paper examines the effect of bank competition on bank liquidity creation and explores whether the effect varies by the diversification level of banks, using a sample of Malaysian banks from 2001 to 2017. Our preliminary analysis shows that the aggregate, on- and off-balance sheet liquidity creation of banks decreases when their market power drops, suggesting an adverse effect of bank competition on bank liquidity creation. However, the adverse effect diminishes or disappears for highly diversified banks, and this result holds for both asset and income diversification. The results identify diversification as a “buffer” through which banks could insure their liquidity creation business against competition by generating new income sources for the banks and enhancing their tolerance to intermediation margin compression.

Suggested Citation

  • Moau Yong Toh & Christopher Gan & Zhaohua Li, 2020. "Bank Diversification, Competition And Liquidity Creation: Evidence From Malaysian Banks," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 65(04), pages 1127-1156, June.
    • Handle: RePEc:wsi:serxxx:v:65:y:2020:i:04:n:s0217590819500103
    DOI: 10.1142/S0217590819500103
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    Cited by:

    1. Duan, Yuejiao & Fan, Xiaoyun & Li, Xinming & Rong, Yuhao & Shi, Benye, 2021. "Do efficient banks create more liquidity: international evidence," Finance Research Letters, Elsevier, vol. 42(C).
    2. Dang, Van Dan & Huynh, Japan, 2022. "Bank funding, market power, and the bank liquidity creation channel of monetary policy," Research in International Business and Finance, Elsevier, vol. 59(C).

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