Does economic growth affect the relationship between banks' capital, liquidity and profitability: empirical evidence from emerging economies

Abstract

PurposeThis research explores the role of economic growth to influence the inter-relationship between capital, liquidity and profitability of commercial banks in selected asian emerging economies.Design/methodology/approachTo achieve the research purpose, an empirical model was constructed to examine the role of economic growth in the inter-relationship between banks' capital, liquidity and profitability. The empirical model was tested through two stage lease square (2SLS) regression analysis using annual data of Asian commercial banks ranges from 2011 to 2019.FindingsThe findings indicate that bank capital and liquidity are interdependent and determined simultaneously. The outcome demonstrates that the strength of the inter-relationship between banks' capital, liquidity, and profitability improves when economic growth is taken into account in the analysis. The results report that market funding, loan ratio, credit risk, bank size and bank efficiency are significant indicators to influence commercial banks' liquidity, profitability and capital in Asian emerging economies. The findings are heterogeneous across large, medium and small-sized banks in emerging economies of Asia.Practical implicationsThe results highlight that the model provides robust results with respect to sign and significance. However, the coefficient remains underestimated without incorporating economic growth, which has important implications for decision-makers and bankers.Originality/valueTo the best of authors’ knowledge, this is the first study that examines the role of economic growth to influence the inter-relationship between capital, liquidity and bank profitability in the emerging economies of Asia.

Ex ante, ex post risk and bank capital ratios: an empirical investigation

“…The coefficient of a lagged variable is representing the speed of adjustment for bank risk. The higher the value of the coefficient indicates the higher time required to restore equilibrium, which is in line with (Abbas et al , 2021a, b, c). The first stream of results shows the expected time for future risk means “ex ante risk,” and how much time is required by banks to settle their previous risk means “ex post risk.” The results show that banks need more time to adjust their ex post risk than ex ante risk.…”

“…The sample is a balanced panel with 10,140 bank year observations covering the 507 cooperative and commercial banks operating in Japan for local and international services. The categories of banks are well-capitalized (if the risk-based capital ratio is more than 8%), under-capitalized (if the risk-based capital ratio is less than 8%) in line with (Abbas et al , 2021). The high and low liquid banks are divided on the average of liquidity ratio where the high and low growth is divided on the average growth of loans consistent with (Abbas and Masood, 2020b).…”

“…By following the recent banking literature (Abbas et al , 2021; Ding and Sickles, 2019), the control variables include bank-specific factors (profitability, liquidity, efficiency, size, loan growth) and to control the macroeconomic conditions, the study uses business cycle (annual change in real gross domestic product) and inflation rate (consumer price index), which are in line with (Abbas and Masood, 2020b; Lee and Hsieh, 2013).…”

“…The consequences of GFC demanded a solid and stable financial system to deal with unexpected financial and economic turmoil. Therefore, in the last ten years of postcrisis, many researchers have investigated the relationship between bank capital and risk-taking for developed and developing economies of the globe (Abbas et al , 2021; Bitar et al , 2018; Chalermchatvichien et al , 2014; Ding and Sickles, 2019). Despite the progress, there is no consensus on the relationship between bank capital ratios and bank risk in the existing literature.…”

Is Economic Freedom a Moderator of the Relationship Between Bank Capital and Profitability?

“…Measurements Bank profitability (ROA) Net income/total assets (Yousaf, Ali, & Hassan, 2019) Capital ratio Total equity/total assets (Ali, Yousaf, & Naveed, 2020;Yousaf, Ali, & Hassan, 2019) Tier-I ratio Tier-I equity/total assets (Phan, Pham, Nguyen, & Nguyen, 2021) Risk-based capital ratio Tier-I plus Tier-II/risk-weighted assets (Abbas, Ali, Yousaf, & Rizwan, 2020) Tier-I risk-based ratio Tier-I equity/risk-weighted assets (Abbas, Ali, & Ahmad, 2021) Economic freedom…”