Bank Liquidity Hoarding Strategies in Uncertain Times: New Evidence from an Emerging Market with Bank-level Data

Abstract


 
 
 The paper explores the impact of uncertainty on bank liquidity hoarding, particularly providing new insights on the nature of the impact by bank-level heterogeneity. We consider the cross-sectional dispersion of shocks to key bank variables to estimate uncertainty in the banking sector and include all banking items to construct a comprehensive measure of bank liquidity hoarding. Using a sample of Vietnamese banks during 2007–2019, we document that banks tend to increase total liquidity hoarding in response to higher uncertainty; this pattern is still valid for on- and off-balance sheet liquidity hoarding. Further analysis with bank-level heterogeneity indicates that the impact of banking uncertainty on liquidity hoarding is significantly stronger for weaker banks, i. e., banks that are smaller, more poorly capitalized, and riskier. In testing the “search for yield” hypothesis to explain the linkage between uncertainty and bank liquidity hoarding, we do not find it to be the case. Our findings remain extremely robust after multiple robustness tests.
 
 

Evaluating The Significance of Uncertainty on Bank Liquidity: A Case Study of Ukrainian Banks in Russian Military Aggression

“…Regression analyses show that higher EPU results in statistically and economically significant increases in total bank liquidity hoarding, as well as increases in the asset-, liability-and off-balance sheet-side components (Berger et al, 2022). Dang and Nguyen (2021) and Dang (2022) explores the relationship between uncertainty at the micro level, such as income fluctuations and volatility, affects the ability of banks to create liquidity. The hypothesis put forth in the article is that banks with a more diversified income structure are better equipped to handle micro-level uncertainty and are more effective in creating liquidity.…”