Bank capital and bank stability: The mediating role of liquidity creation and moderating role of asset diversification

Thanh Huu Vu and Trung Ngo

Cogent Business & Management, 2023, vol. 10, issue 2, 2208425

Abstract: Regulators and managers in the banking sector prioritize the banking system’s stability and safety to limit risks, shocks, and potential losses. This study reveals why a bank is more or less stable via bank capital, liquidity creation, and asset diversification. We form a structural model in which bank capital affects stability through liquidity creation, and asset diversification moderates the relationship between liquidity and stability of banks. We employ a moderated mediation model and the Partial Least Squares Structural Equation Modeling (PLS-SEM) with panel data on 27 commercial banks publicly listed in Vietnam from 2014 to 2021. Surprisingly, the empirical results show that raising bank capital reduces liquidity creation while lowering liquidity creation increases bank stability. Thus bank capital has a positive impact on stability via the mediating role of liquidity creation. Moreover, the relationship between liquidity creation and bank stability is moderated by “asset diversification”. Higher asset diversification mitigates the detrimental impact of liquidity creation on bank stability and vice versa. Finally, this study recommends using bank capital, liquidity creation, and asset diversification to bolster bank stability.

Date: 2023
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/23311975.2023.2208425 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:oabmxx:v:10:y:2023:i:2:p:2208425

Ordering information: This journal article can be ordered from
http://cogentoa.tandfonline.com/journal/OABM20

DOI: 10.1080/23311975.2023.2208425

Access Statistics for this article

Cogent Business & Management is currently edited by Len Tiu Wright and Tahir Nisar

More articles in Cogent Business & Management from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().