The dual role of liquidity creation in bank default risk: evidence form North Africa

Sedki Zaiane

African Journal of Economic and Management Studies, 2025, vol. 16, issue 4, 630-644

Abstract: PurposeThe purpose of this study is to examine the relationship between liquidity creation (LC) and bank default risk and whether the level of LC matters in shaping this relationship.Design/methodology/approachThis study is based on a sample of 46 North African banks for the period extending from 2006 to 2022. To investigate the potential nonlinear relationship, we adopt a dynamic panel threshold method.FindingsThe results reveal that the relationship between LC and default risk is nonlinear and depends on the level of LC. More precisely, we find that below the threshold value, the relationship is found to be negative and it turns to be positive once we surpass the threshold value of LC.Originality/valueThis paper gives a more complete and detailed image on the relationship between LC and default risk using a nonlinear methodology, which extends to the current literature’s insight.

Keywords: Default risk; Liquidity creation; North Africa; Panel threshold models (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ajemsp:ajems-02-2025-0135

DOI: 10.1108/AJEMS-02-2025-0135

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