The Effect of Liquidity on Profitability in Commercial Banks: Evidence from Turkish Banking Sector

Ahmet Karakas and Melek Acar

Journal of BRSA Banking and Financial Markets, 2022, vol. 16, issue 2, 139-171

Abstract: It is essential for banks to keep an optimal level of liquid assets, especially against the liquidity risk arising from maturity mismatch, in order to maintain the confidence of the market and customers. However, there is an alternative cost of holding liquid assets, which also affects profitability. The aim of this research is to investigate the relationship between liquidity and profitability in commercial banks. A total of 20 commercial banks were included in the research among commercial banks operating in Turkey during the 2002-2020 period, and quarterly periods from the end of 2002 to the end of 2020 were taken into account in the financial data regarding the banks. In the study conducted with the panel data analysis method and estimation was made with Driscoll-Kraay, Parks-Kmenta and Beck-Katz from estimators capable of producing robust standard errors. As a result of the research; liquid assets ratio and current ratio has positive relationship with return on assets ratio, while negative relationship with return on equity ratio and net interest margin, acid-test ratio has a negative relationship with return on assets ratio while positive relationship with return on equity and net interest margin, loans to deposits ratio negatively affect all three profitability ratios. In general, it is understood that there is a negative relationship between liquidity and profitability.

Keywords: Liquidity; Profitabilty. Journal: Journal of BRSA Banking and Financial Markets (search for similar items in EconPapers)
JEL-codes: C33 G21 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:bdd:journl:v:16:y:2022:i:2:p:139-171

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