The Impact of Liquidity Risk On Bank Profitability: Some Empirical Evidence from The European Banks Following the Introduction of Basel III Regulations

Olga Golubeva (), Michel Duljic and Ripsa Keminen
Additional contact information
Olga Golubeva: Stockholm Business School, Stockholm University, Sweden
Michel Duljic: Ernst & Young (EY), Sweden
Ripsa Keminen: Willis Towers Watson, Sweden

Journal of Accounting and Management Information Systems, 2019, vol. 18, issue 4, 455-485

Abstract: Research Question: The study investigates the impact of liquidity on bank profitability following implementation of the Basel III regulations. Motivation: The theoretical framework of the paper draws upon previous research (Athanasoglou et al., 2008; Arif & Nauman Anees, 2012 and Dietrich et al., 2014) and assumes liquidity ratios to have a varying influence on bank profitability, depending upon a bank's specific and macroeconomic indicators. Idea: This study considers multiple proxies of bank liquidity, including Liquidity Coverage Ratio, a new measure inspired by the Basel III framework, and Loan-to-deposit and Financing gap ratio. Alongside traditionally-applied profitability measures, Earnings before Taxes, Depreciation and Amortisation are assumed to be alternative proxies. Data: In the study, a data set of 45 European banks with 180 observations during 2014-2017 and 37 observations for 2018 has been analysed. Tools: The study proposes a quantitative model based upon Ordinary Least Squires techniques complemented by Weighted Least Squares regressions analysis. Findings: The alternative liquidity risk measures have a significant and positive impact only on some profitability proxies, and an insignificant effect on others. The Basel III liquidity measure, LCR, was an insignificant contributor to all return proxies, which requires further investigation. The results also indicate that an increase in bank size and net provision for loan losses decreases profitability proxies. We also found mixed results concerning the effects of deposits and securities gains and losses on bank profits, and provided possible explanation.

Keywords: Bank profitability; Liquidity; Basel III regulations; Financial ratio analysis; Liquidity coverage ratio (LCR); European banking system (search for similar items in EconPapers)
JEL-codes: G21 M41 M48 (search for similar items in EconPapers)
Date: 2019
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://online-cig.ase.ro/RePEc/ami/articles/18_4_1.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ami:journl:v:18:y:2019:i:4:p:455-485

Access Statistics for this article

More articles in Journal of Accounting and Management Information Systems from Faculty of Accounting and Management Information Systems, The Bucharest University of Economic Studies
Bibliographic data for series maintained by Cristina Tartavulea ().