Is excess of everything bad? Ramifications of excess liquidity on bank stability: Evidence from the dual banking system
After the 2008 financial crisis, the primary focus of global banking regulators has been to make banks more liquid by maintaining excess liquidity buffers. This paper investigates a paradox where high liquidity reduces bank stability instead of improving it by examining the relationship between exce...
| Main Authors: | , , |
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| Format: | Article |
| Language: | English |
| Published: |
Elsevier
2022-12-01
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| Series: | Borsa Istanbul Review |
| Subjects: | |
| Online Access: | http://www.sciencedirect.com/science/article/pii/S2214845022000795 |
| _version_ | 1797903360529006592 |
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| author | Sadia Ahmad Wan Marhaini Wan Ahmad Shahrin Saaid Shaharuddin |
| author_facet | Sadia Ahmad Wan Marhaini Wan Ahmad Shahrin Saaid Shaharuddin |
| author_sort | Sadia Ahmad |
| collection | DOAJ |
| description | After the 2008 financial crisis, the primary focus of global banking regulators has been to make banks more liquid by maintaining excess liquidity buffers. This paper investigates a paradox where high liquidity reduces bank stability instead of improving it by examining the relationship between excess liquidity and stability between Islamic and conventional banks. This paper uses data on 42 Islamic and 106 conventional banks from 6 emerging countries between 2009 and 2018, providing empirical evidence that excess banking liquidity impedes bank stability. The results show that conventional banks are more vulnerable to the adversities of excess liquidity, while Islamic banks exhibit more resilience. This study raises ‘red flags’ for policymakers and regulators advocating high liquidity as a source of financial stability. It suggests that regulators should be cautious when using the so-called ‘liquidity bazooka’ to guard banks against any economic downturn, such as during the COVID-19 era. |
| first_indexed | 2024-04-10T09:31:40Z |
| format | Article |
| id | doaj.art-1ec999bb3509401088166cdc2a90f322 |
| institution | Directory Open Access Journal |
| issn | 2214-8450 |
| language | English |
| last_indexed | 2024-04-10T09:31:40Z |
| publishDate | 2022-12-01 |
| publisher | Elsevier |
| record_format | Article |
| series | Borsa Istanbul Review |
| spelling | doaj.art-1ec999bb3509401088166cdc2a90f3222023-02-19T04:25:46ZengElsevierBorsa Istanbul Review2214-84502022-12-0122S92S107Is excess of everything bad? Ramifications of excess liquidity on bank stability: Evidence from the dual banking systemSadia Ahmad0Wan Marhaini Wan Ahmad1Shahrin Saaid Shaharuddin2Faculty of Business and Economics, University of Malaya, Malaysia; Hailey College of Banking & Finance, University of the Punjab, Lahore, PakistanFaculty of Business and Economics, University of Malaya, Malaysia; Corresponding author. Faculty of Business and Economy University Malaya, Level 4, Azman Hashim Building, 50603 Lembah Pantai, Kuala Lumpur, Malaysia.Faculty of Business and Economics, University of Malaya, MalaysiaAfter the 2008 financial crisis, the primary focus of global banking regulators has been to make banks more liquid by maintaining excess liquidity buffers. This paper investigates a paradox where high liquidity reduces bank stability instead of improving it by examining the relationship between excess liquidity and stability between Islamic and conventional banks. This paper uses data on 42 Islamic and 106 conventional banks from 6 emerging countries between 2009 and 2018, providing empirical evidence that excess banking liquidity impedes bank stability. The results show that conventional banks are more vulnerable to the adversities of excess liquidity, while Islamic banks exhibit more resilience. This study raises ‘red flags’ for policymakers and regulators advocating high liquidity as a source of financial stability. It suggests that regulators should be cautious when using the so-called ‘liquidity bazooka’ to guard banks against any economic downturn, such as during the COVID-19 era.http://www.sciencedirect.com/science/article/pii/S2214845022000795Excess liquidityBank stabilityLiquidity injectionZ-scoreDual banking system |
| spellingShingle | Sadia Ahmad Wan Marhaini Wan Ahmad Shahrin Saaid Shaharuddin Is excess of everything bad? Ramifications of excess liquidity on bank stability: Evidence from the dual banking system Borsa Istanbul Review Excess liquidity Bank stability Liquidity injection Z-score Dual banking system |
| title | Is excess of everything bad? Ramifications of excess liquidity on bank stability: Evidence from the dual banking system |
| title_full | Is excess of everything bad? Ramifications of excess liquidity on bank stability: Evidence from the dual banking system |
| title_fullStr | Is excess of everything bad? Ramifications of excess liquidity on bank stability: Evidence from the dual banking system |
| title_full_unstemmed | Is excess of everything bad? Ramifications of excess liquidity on bank stability: Evidence from the dual banking system |
| title_short | Is excess of everything bad? Ramifications of excess liquidity on bank stability: Evidence from the dual banking system |
| title_sort | is excess of everything bad ramifications of excess liquidity on bank stability evidence from the dual banking system |
| topic | Excess liquidity Bank stability Liquidity injection Z-score Dual banking system |
| url | http://www.sciencedirect.com/science/article/pii/S2214845022000795 |
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