The effect of liquidity creation on bank profitability and credit risk: evidence from BRICS countries

Rosy Chauhan and Anil K. Sharma

Afro-Asian Journal of Finance and Accounting, 2025, vol. 15, issue 1, 19-40

Abstract: In this study, we empirically investigate whether liquidity creation after the implementation of liquidity regulations can help boost profitability and reduce credit risk for emerging economies. This study analyses a sample of 499 commercial banks from the BRICS countries between 2013 and 2021 and applies the two-step system generalised method of moments (GMM). Further, results are confirmed through robustness tests. The study's findings indicate a positive impact of liquidity creation on bank profitability, but this doesn't hold true for small banks. Also, findings indicate that more liquidity creation leads to an increase in credit risk. Thus, the results suggest that regulators should devise measures to restrict excessive liquidity creation and call for combined regulation of liquidity and credit risk.

Keywords: liquidity creation; profitability; credit risk; BRICS; Basel III. (search for similar items in EconPapers)
Date: 2025
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