The Role of Regulatory Capital and Ownership Structure in Bank Liquidity Creation: Evidence From Emerging Asian Economies

Abstract

We examine the effect of regulatory capital and ownership structure on banks’ liquidity creation in emerging Asian economies. We find a positive association between regulatory capital and bank liquidity creation, which is consistent with the risk-absorption hypothesis. Bank size has a positive relation with liquidity creation, implying that large banks have more capacity to create liquidity as they enjoy more of the safety net provided by lenders of last resort in the event of crisis, the advantage of reputational benefit, and easier access to external market funding. The negative effect of the bank funding structure is that, as the subordinate debt is typically uninsured, higher funding costs lead banks to reduce liquidity creation. The results imply that an increase in interest rates worsens liquidity creation. For ownership structure, the results show the significance of the impact of ownership concentration on liquidity creation. Banking institutions having higher equity and higher concentration ownership leads to improved liquidity creation.