Do banks adjust their liquidity to cope with environmental variation? A study of bank deregulation

Yaoyao Fan, Showyi Jiang and Kim Ly
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Yaoyao Fan: Glasgow School of Business and Society, Glasgow Caledonian University
Showyi Jiang: Leeds University Business School, University of Leeds
Kim Ly: School of Management, Swansea University

No 2018-31, Working Papers from Swansea University, School of Management

Abstract: The effect of bank deregulation on adjustment speed of bank liquidity is the focus of this paper. We find that banks tend to increase their adjustment speed of liquidity in response to bank deregulation. Banks tend to escape their current state and move to a state with less deregulation. Those banks that move to the less deregulated state reduce their adjustment speed. A strategic movement of headquarters helps banks to fend off competitive pressure. The environmental factors of population and personal income reduce the market-based focus flexibility of banks; however, higher interest expenses incentivise banks to increase their speed. Surviving banks and acquiring banks react as market-makers whereas target banks respond as market-takers. Failed banks lose their distinct competencies to react properly when environmental variation occurs. Banks affiliated with multi-bank holding companies holding a larger network and larger environment are able to increase their liquidity adjustment speed. The observable trends of how banks adjust liquidity in response to bank deregulation have important regulatory implications in reducing the environmental challenges faced by banks.

Keywords: environmental variation; bank liquidity; adjustment speed; bank deregulation; Basel III Net Stable Funding Ratio (search for similar items in EconPapers)
JEL-codes: G20 G21 G38 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2018-10-08
New Economics Papers: this item is included in nep-ban and nep-cfn
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