A Financial Analysis of the Liquidity Creation and the Capital Holdings of Turkish Banks

Abstract

In this paper, the impact of the amount of bank capital on the bank liquidity creation is explored using a sample of 21 Turkish banks and quarterly data for the period 2010Q1-2017Q4. Our methodology involves fixed effects panel data estimation techniques and we use lagged independent variables to control for endogeneity. Our findings indicate that the liquidity creation of Turkish banks has dramatically increased over time and it is primarily driven by large banks. Our results from the regression analysis indicate that bank liquidity creation is increased under higher levels of capital for the whole sample. While a higher level of bank capital increases bank liquidity for small banks, the opposite case occurs for large banks, namely, the created liquidity decreases by more bank capital. We offer some important policy implications in that while regulators in the emerging markets impose capital requirements on banks, they need to consider the impact on liquidity creation of banks of different sizes.

Does raising bank capital limit bank liquidity creation? Evidence from commercial banks in Vietnam

“…Hence, the higher the inflation, the lower the liquidity creation function. This result is very consistent with the theory and the results of many previous studies Bouwman, 2009, 2017;Berger, Bouwman and Berger, 2014;Fungacova, Turk and Weill, 2015;Fu, Lin et al Molyneux, 2016;Li and Malone, 2016;Tran, Lin and Nguyen, 2016;Ozturk Danisman, 2018;Le, 2019).…”

“…The results strongly support the financial fragility-crowding out hypothesis, as expected. They are not only in line with mentioned theories but also many previous studies (Berger et al, 2016;Berger & Bouwman, 2009;Fu et al, 2016;Fungacova et al, 2015;Le, 2019;Li & Malone, 2016;Ozturk Danisman, 2018;Tran et al, 2016). This result also confirms that our first hypothesis is entirely appropriate for the Vietnamese banking system during the research period, when racing to increase bank equity was observable.…”

“…While theories imply a causal link between capital and liquidity creation, the issue is more complicated in practice, and both might be determined simultaneously. Recently, this relationship has been investigated through several studies (Berger et al, 2014;Berger & Bouwman, 2009;Fungacova et al, 2015;Fungáčová et al, 2017;Li & Malone, 2016;Ozturk Danisman, 2018;Tran et al, 2016;Tu, 2015). Initially, according to the main results of Berger & Bouwman (2009), there is an effect of liquidity on banks' capital, and this effect is clearly different between the two groups of small and large banks.…”