A study on the interaction of capital, liquidity and bank stability

Francisco Javier Población García and Nuria Suárez

No 3134, Working Paper Series from European Central Bank

Abstract: The purpose of this paper is to empirically examine the effects of capital and liquidity on bank stability as well as the existence of a potential complementary or substitute relationship between both dimensions to explain bank stability. We use a sample of 16,061 banks from 27 countries during the period 2013-2023. Our results show that both capital and liquidity increase bank stability. However, the joint interactive effect presents a negative coefficient indicating the existence of a potential substitution effect between both variables. We also provide evidence on market power acting as a potential mechanism explaining the baseline relationships. Furthermore, the results seem to be modulated by specific bank- and country-level factors. JEL Classification: G20, G21, G28, K00

Keywords: bank-level characteristics; bank stability; capital; country-level characteristics; liquidity (search for similar items in EconPapers)
Date: 2025-10
New Economics Papers: this item is included in nep-mon
Note: 1845518
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20253134

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