External governance in the form of market competition and its impact on the bank liquidity: an analysis under the influence of profitability

Shailesh Rastogi, Bhakti Agarwal and Jagjeevan Kanoujiya

Journal of Financial Regulation and Compliance, 2025, vol. 34, issue 1, 114-131

Abstract: PurposeMarket competition is now taken as the external governance mechanism that refers to how the competitive pressure in market environment regulate the behavior and performance of the business. In this direction, this study aims to explore the association between competition, bank liquidity and profitability.Design/methodology/approachSecondary data including 24 banks as cross-sectional units and 13 years (2010–2022) sample period as the time dimension for balanced panel data, is used in this study. Quantile panel data analysis, including quadratic analysis (for nonlinear connection), is used to find the association among the three variables of interest.FindingsThe main findings of the study are: a low level of completion is detrimental to the bank’s liquidity; profitability with low competition and low liquidity are equally harmful to the liquidity risk situations in a bank; and profitability with low competition support to reduce the negative impact of low competition on the liquidity if the liquidity is relatively high.Research limitations/implicationsThis study is limited to its scope in Indian banks. The findings of the study cannot be generalized to nonfinancial firms because of its different operational and reporting approach.Practical implicationsPolicymakers need to ensure that they support a market where competition does not fall below a certain level to reduce bank liquidity risks. Bankers should also not view low competition favorably, especially for liquidity issues, including when they have profitable banks. Managers have to focus on adhering to external governance to manage competitive pressures to cope up with liquidity and profitability. Investors should understand the criticality of competition as an external factor for banks’ liquidity and profitability.Originality/valueThe literature does not have studies covering bank profitability, competition and liquidity. This research ensures novelty. In addition, the study’s findings are unique in more than one way, which also provides originality to the work.

Keywords: Bank; Liquidity; Profitability; Competition; India (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfrcpp:jfrc-08-2024-0150

DOI: 10.1108/JFRC-08-2024-0150

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