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The impact of bank liquidity risk on risk-taking and bank lending: evidence from European bank

Author

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  • Hongyan Liang

    (Faculty of Business Administration Gies College of Business University of Illinois Urbana-Champaign Champaign IL 61820, USA Author-2-Name: Zilong Liu Author-2-Workplace-Name: Discover Financial Service Riverwoods IL 60015, USA Author-3-Name: Author-3-Workplace-Name: Author-4-Name: Author-4-Workplace-Name: Author-5-Name: Author-5-Workplace-Name: Author-6-Name: Author-6-Workplace-Name: Author-7-Name: Author-7-Workplace-Name: Author-8-Name: Author-8-Workplace-Name:)

Abstract

"Objective - This paper uses a sample of annual observations of European banks to examine whether the liquidity risk affects a bank's risk-taking behavior and its future loan growth. Methodology � A sample of European banks (27 member countries of the European Union plus U.K.) over the period of 2005 to 2019 are used in this study. Liquidity risk is measured by the ratio of liquid assets to total assets. Given the longitudinal nature of the data, the authors use panel regression with bank fixed effects to control for unobserved characteristics that might affect the dependent variable. Findings � The authors find that banks holding more liquid assets take less risk and show a higher subsequent loan growth rate. These results hold for both small and large banks. Novelty � To the authors' best knowledge, this is one of the earliest studies to carefully examine the effects of liquidity risk on risk-taking behavior and loan growth rate for European banks. Our research suggests that the current Basel III requirement on liquidity ratio can decrease bank's risking-taking behavior while not necessarily impact their future loan growth. Type of Paper - Empirical"

Suggested Citation

  • Hongyan Liang, 2021. "The impact of bank liquidity risk on risk-taking and bank lending: evidence from European bank," GATR Journals jfbr187, Global Academy of Training and Research (GATR) Enterprise.
    • Handle: RePEc:gtr:gatrjs:jfbr187
    DOI: https://doi.org/10.35609/jfbr.2021.6.2(2)
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    References listed on IDEAS

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    1. Allen N. Berger & Christa H. S. Bouwman, 2009. "Bank Liquidity Creation," The Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3779-3837, September.
    2. Douglas W. Diamond & Raghuram G. Rajan, 2001. "Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 287-327, April.
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    4. Smaoui, Houcem & Mimouni, Karim & Miniaoui, Héla & Temimi, Akram, 2020. "Funding liquidity risk and banks' risk-taking: Evidence from Islamic and conventional banks," Pacific-Basin Finance Journal, Elsevier, vol. 64(C).
    5. Demirguc, Asli & Laeven, Luc & Levine, Ross, 2003. "The impact of bank regulations, concentration, and institutions on bank margins," Policy Research Working Paper Series 3030, The World Bank.
    6. Ameni Ghenimi & Hasna Chaibi & Mohamed Ali Brahim Omri, 2017. "The effects of liquidity risk and credit risk on bank stability: Evidence from the MENA region," Borsa Istanbul Review, Research and Business Development Department, Borsa Istanbul, vol. 17(4), pages 238-248, December.
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    More about this item

    Keywords

    Bank Liquidity Risk; Risk-taking Behavior; Loan Growth; Basel III;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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