Bank Liquidity and Bank Performance: Looking for a Nonlinear Nexus

Eldar Sedaghat Parast (), Siavash Golzarian Pour () and Vahid Hajizadeh ()
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Eldar Sedaghat Parast : Iran Banking Institute
Siavash Golzarian Pour: Iran Banking Institute
Vahid Hajizadeh : Parsian Bank

Journal of Money and Economy, 2021, vol. 16, issue 4, 417-446

Abstract: Liquid assets are critical for banking operations. They guarantee avoiding liquidity risk and widens managerial decision options to invest in emerging profitable projects; however, holding extra liquidity entails opportunity costs. Accordingly, empirical literature does not provide a conclusive relationship between liquidity and profitability. The purpose of this research is to analyze the asymmetric effects of holding liquid assets by commercial banks on their profitability. Parallel to a detailed review of contradicting theories and empirical evidence, we have developed an econometric model to capture the nonlinear effects of liquidity on performance. The proposed model is tested for a sample of seven listed Iranian commercial banks during 2006-2018 by Arellano-Bond dynamic panel-data estimation. We found that the nonlinear relationship, if any, is not an inverse U as Bordeleau and Graham (2010) suggested. Results show a positive (holding more liquid assets increases the profitability of Iranian banks), and even an accelerating effect for liquidity, likely due to the low level of liquid assets maintained by Iranian banks.

Keywords: Liquidity; Profitability; Non linearity; Commercial banks (search for similar items in EconPapers)
JEL-codes: C58 E58 G21 (search for similar items in EconPapers)
Date: 2021
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