Liquidity, liquidity risk and liquidity regulation in banking

Abstract

This thesis focuses on the importance of bank liquidity in the overall banking system during various liquidity shocks. To this end, three different empirical research are conducted in this thesis. We start with an investigation of the impact of bank market power on liquidity creation during the global financial crisis (GFC) in European banking. Second, we extend our analysis and examine how the liquidity ratio requirements under Basel III affects their risk and return. Following this, we consider the banking system in the Gulf Cooperation Council (GCC) and investigate whether the effect of the oil price shock that began in June 2014 on bank lending differs depending upon the level of bank liquidity.
Using different causal effect econometric analysis, we present robust evidence for the following findings. First, we find that banks with greater market power significantly increase liquidity creation in the economy. Second, we present strong evidence for a positive link between bank liquidity and their ability to mitigate a negative shock. Focusing on the GFC, we find that the combined effect of high market power and government intervention through guarantees reduces liquidity creation as the level of bank liquidity increases to ensure financial stability. In addition, we find that adherence to the liquidity requirements under Basel III causes financial stability of European banks to increase. Also, we find evidence of a trade-off between liquidity and bank profitability. The subsequent analysis of bank lending in the GCC countries during the oil price shock suggests that credit growth generally declines as a result of lower oil prices. However, banks with a high level of liquidity buffers mitigate the impact of the oil price shock. This offers greater support for the view that higher liquidity buffers are a source of reducing potential bank distress and promote financial stability during crises years.

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ORCID for Simon Wolfe: orcid.org/0000-0001-9815-9535

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