Bank regulatory capital and liquidity creation: evidence from BRICS countries

Muhammad Umar, Gang Sun, Khurram Shahzad and Zia-ur-Rehman Rao

International Journal of Emerging Markets, 2018, vol. 13, issue 1, 218-230

Abstract: Purpose - The purpose of this paper is to explore the relationship between bank regulatory capital and liquidity creation in banks of BIRCS countries. Design/methodology/approach - Data from all publicly listed banks of BRICS nations for the period 2003-2014 have been collected and analyzed. Two-stage least-squares regression has been used to control endogeneity. The econometric model includes different control variables that have been selected based on the extant literature. Findings - Increase in bank capital negatively affects bank liquidity creation which implies that “financial fragility-crowding out” hypothesis holds for banks of BRICS countries. Originality/value - This study provides the evidence of the inverse relationship between bank regulatory capital and liquidity creation from emerging economies. The findings show that there is a trade-off between curtailing bank risk taking and liquidity creation. Therefore, the regulators must formulate policies to strike a balance between the two.

Keywords: Regulatory capital; Bank; Emerging economies; Liquidity creation; BRICS countries; G21; G28 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijoemp:ijoem-04-2015-0072

DOI: 10.1108/IJoEM-04-2015-0072

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