Stock market liquidity and bank stability

Ama Samarasinghe

Pacific-Basin Finance Journal, 2023, vol. 79, issue C

Abstract: Motivated by the global liberalisation of financial systems, this paper is the first to explore the relation between aggregate stock market liquidity and bank stability. Using a cross-country sample, this paper documents a positive association between stock market liquidity and bank stability at both bank- and systemic- levels. The relevant economic channel is the diversification channel which suggests that as stock market liquidity increases, banks diversify into other non-traditional activities, thereby increasing their stability. These effects are more prominent in banks operating in countries with developed markets and further in banks operating in markets which provide higher levels of protection to market participants. These results have important policy and practical implications and are robust to several tests.

Keywords: Stock market liquidity; Bank stability; Bank diversification; Financial institution interaction; Financial markets; Legal origin (search for similar items in EconPapers)
JEL-codes: G15 G18 G21 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:79:y:2023:i:c:s0927538x2300094x

DOI: 10.1016/j.pacfin.2023.102028

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