The Effect of Liquidity According to the Requirements of the Basel III Committee on the Profitability of Banks: Evidence from Saudi Banks

Abstract

Purpose: This current study investigates the impact of this new liquidity regulation on banks' profitability in Saudi Arabia. A sample of 12 Saudi banks covering the period 2015-2018 was used in the study. Design/Methodology/Approach: This study adopted several models of panel data, such as the pooled ordinary least square, the fixed effects model and the random effects model. Findings: The empirical results indicated that the new liquidity ratio had no impact on Saudi banks' profitability, as it was plausibly illustrated that, when the banks maintained their liquidity levels following application of the Liquidity Coverage Ratio, they would have lower funding costs and risk, hence increasing the banks' profitability. Originality/Value: This study contributes by investigating the effect of the implementation of the new liquidity standards on the profitability of Saudi Banks.