CAPITAL ADEQUACY, LIQUIDITY CREATION, AND PANDEMIC CRISES: AN EMPIRICAL STUDY ON INDONESIAN RURAL BANKS
Article Sidebar
Published
Sep 26, 2022
Main Article Content
Abstract
The aim of this article is to examine the relationship between capital adequacy, liquidity creation, and the pandemic crisis in Rural Banks. There are 435 banks as samples from 2019 – 2021. For hypothesis testing, I use regression techniques within-estimator and two-stage least square to overcome heterogeneity and endogeneity problems. The results support the theory of financial fragility crowding out so that capital adequacy is negatively associated with liquidity creation. In fact, the nexus is greater during the covid-19 pandemic crisis. In the end, this research has theoretical and practical implications.
Article Details
How to Cite
AL HASHFI, Rizqi Umar.
CAPITAL ADEQUACY, LIQUIDITY CREATION, AND PANDEMIC CRISES: AN EMPIRICAL STUDY ON INDONESIAN RURAL BANKS.
Proceedings of the International Conference of Islamic Economics and Business (ICONIES), [S.l.], v. 8, n. 1, p. 35-44, sep. 2022.
ISSN 2541-3333.
Available at: <http://conferences.uin-malang.ac.id/index.php/iconies/article/view/1907>. Date accessed: 16 apr. 2024.
Issue
Section
Articles
References
BCBS. (2010). Basel Committee on Banking Supervision Basel III : International framework for liquidity risk measurement , standards and monitoring. In Bank for International Settlements (Issue December).
BCBS. (2011). Basel III: A global regulatory framework for more resilient banks and banking systems (Issue June). http://www.bis.org/publ/bcbs189_dec2010.pdf
Bekiros, S., Nilavongse, R., & Uddin, G. S. (2018). Bank capital shocks and countercyclical requirements: Implications for banking stability and welfare. Journal of Economic Dynamics and Control, 93, 315–331. https://doi.org/10.1016/j.jedc.2018.01.049
Berger, A. N., & Bouwman, C. H. S. (2009). Bank liquidity creation. Review of Financial Studies, 22(9), 3779–3837. https://doi.org/10.1093/rfs/hhn104
Bossone, B. (2001). Circuit theory of banking and finance. In Journal of Banking and Finance (Vol. 25, Issue 5). https://doi.org/10.1016/S0378-4266(00)00100-X
Bui, C., Scheule, H., & Wu, E. (2017). The value of bank capital buffers in maintaining financial system resilience. Journal of Financial Stability, 33, 23–40. https://doi.org/10.1016/j.jfs.2017.10.006
Cao, Y., & Chou, J. Y. (2022). Bank resilience over the COVID-19 crisis: The role of regulatory capital. Finance Research Letters, 48(February), 102891. https://doi.org/10.1016/j.frl.2022.102891
Casu, B., di Pietro, F., & Trujillo-Ponce, A. (2019). Liquidity Creation and Bank Capital. Journal of Financial Services Research, 56(3), 307–340. https://doi.org/10.1007/s10693-018-0304-y
Coffinet, J., Coudert, V., Pop, A., & Pouvelle, C. (2012). Two-way interplays between capital buffers and credit growth: Evidence from French banks. Journal of International Financial Markets, Institutions and Money, 22(5), 1110–1125. https://doi.org/10.1016/j.intfin.2012.05.011
Davydov, D., Fungáčová, Z., & Weill, L. (2018). Cyclicality of bank liquidity creation. Journal of International Financial Markets, Institutions and Money, 55(February 2017), 81–93. https://doi.org/10.1016/j.intfin.2018.02.014
Diamond, D. W., & Rajan, R. G. (2000). A theory of bank capital. Journal of Finance, 55(6), 2431–2465. https://doi.org/10.1111/0022-1082.00296
Distinguin, I., Roulet, C., & Tarazi, A. (2013). Bank regulatory capital and liquidity: Evidence from US and European publicly traded banks. Journal of Banking and Finance, 37(9), 3295–3317. https://doi.org/10.1016/j.jbankfin.2013.04.027
Elnahass, M., Trinh, V. Q., & Li, T. (2021). Global banking stability in the shadow of Covid-19 outbreak. Journal of International Financial Markets, Institutions and Money, 72, 101322. https://doi.org/10.1016/j.intfin.2021.101322
Evans, J. J., & Haq, M. (2021). Does bank capital reduce liquidity creation? Global Finance Journal, January 2020, 100640. https://doi.org/10.1016/j.gfj.2021.100640
Fu, X. M., Lin, Y. R., & Molyneux, P. (2016). Bank capital and liquidity creation in asia pacific. Economic Inquiry, 54(2), 966–993. https://doi.org/10.1111/ecin.12308
Fungáčová, Z., Weill, L., & Zhou, M. (2017). Bank Capital, Liquidity Creation and Deposit Insurance. Journal of Financial Services Research, 51(1), 97–123. https://doi.org/10.1007/s10693-016-0240-7
Greene, W. H. (2018). Econometric Analysis (8th ed.). Pearson Education.
Gupta, J., & Kashiramka, S. (2020). Financial stability of banks in India: Does liquidity creation matter? Pacific Basin Finance Journal, 64(September), 101439. https://doi.org/10.1016/j.pacfin.2020.101439
He, Q., Liu, J., Wang, S., & Yu, J. (2020). The impact of COVID-19 on stock markets. Economic and Political Studies, 4816(May), 1–14. https://doi.org/10.1080/20954816.2020.1757570
Horváth, R., Seidler, J., & Weill, L. (2014). Bank Capital and Liquidity Creation: Granger-Causality Evidence. Journal of Financial Services Research, 45(3), 341–361. https://doi.org/10.1007/s10693-013-0164-4
Le, T. (2019). The interrelationship between liquidity creation and bank capital in Vietnamese banking. Managerial Finance, 45(2), 331–347. https://doi.org/10.1108/MF-09-2017-0337
Li, L., Strahan, P. E., & Zhang, S. (2020). Banks as lenders of first resort: Evidence from the COVID-19 crisis. Review of Corporate Finance Studies, 9(3), 472–500. https://doi.org/10.1093/rcfs/cfaa009
Lindquist, K. G. (2004). Banks’ buffer capital: How important is risk. Journal of International Money and Finance, 23(3), 493–513. https://doi.org/10.1016/j.jimonfin.2004.01.006
Mohanty, S., & Mahakud, J. (2021). Causal Nexus Between Liquidity Creation and Bank Capital Ratio: Evidence from India. Margin: The Journal of Applied Economic Research, 15(2), 205–237. https://doi.org/10.1177/0973801021990399
Narayan, P. K., Gong, Q., & aliahmed, H. J. (2021). Is there a pattern in how COVID-19 has affected Australia’s stock returns? In Applied Economics Letters. https://doi.org/10.1080/13504851.2020.1861190
Nguyen, T. V. H., Ahmed, S., Chevapatrakul, T., & Onali, E. (2020). Do stress tests affect bank liquidity creation? Journal of Corporate Finance, 64(August 2019), 101622. https://doi.org/10.1016/j.jcorpfin.2020.101622
Olivia, S., Gibson, J., & Nasrudin, R. (2020). Indonesia in the Time of Covid-19. Bulletin of Indonesian Economic Studies, 56(2), 143–174. https://doi.org/10.1080/00074918.2020.1798581
Ovi, N., Bose, S., Gunasekarage, A., & Shams, S. (2020). Do the business cycle and revenue diversification matter for banks’ capital buffer and credit risk: Evidence from ASEAN banks. Journal of Contemporary Accounting and Economics, 16(1), 100186. https://doi.org/10.1016/j.jcae.2020.100186
Shim, J. (2013). Bank capital buffer and portfolio risk: The influence of business cycle and revenue diversification. Journal of Banking and Finance, 37(3), 761–772. https://doi.org/10.1016/j.jbankfin.2012.10.002
Toh, M. Y. (2019). Effects of bank capital on liquidity creation and business diversification: Evidence from Malaysia. Journal of Asian Economics, 61, 1–19. https://doi.org/10.1016/j.asieco.2018.12.001
Umar, M., Sun, G., Shahzad, K., & Rao, Z. ur R. (2018). Bank regulatory capital and liquidity creation: evidence from BRICS countries. International Journal of Emerging Markets, 13(1), 218–230. https://doi.org/10.1108/IJoEM-04-2015-0072
Werner, R. A. (2016). A lost century in economics: Three theories of banking and the conclusive evidence. International Review of Financial Analysis, 46, 361–379. https://doi.org/10.1016/j.irfa.2015.08.014
Wooldridge, J. M. (2010). Econometric Analysis of Cross Section and Panel Data (2nd Editio). The MIT Press.
Wooldridge, J. M. (2018). Introductory Econometrics (7th ed.). Cengage Learning, Inc.
Zheng, C., (Wai Kong) Cheung, A., & Cronje, T. (2019). The moderating role of capital on the relationship between bank liquidity creation and failure risk. Journal of Banking and Finance, 108, 105651. https://doi.org/10.1016/j.jbankfin.2019.105651
BCBS. (2011). Basel III: A global regulatory framework for more resilient banks and banking systems (Issue June). http://www.bis.org/publ/bcbs189_dec2010.pdf
Bekiros, S., Nilavongse, R., & Uddin, G. S. (2018). Bank capital shocks and countercyclical requirements: Implications for banking stability and welfare. Journal of Economic Dynamics and Control, 93, 315–331. https://doi.org/10.1016/j.jedc.2018.01.049
Berger, A. N., & Bouwman, C. H. S. (2009). Bank liquidity creation. Review of Financial Studies, 22(9), 3779–3837. https://doi.org/10.1093/rfs/hhn104
Bossone, B. (2001). Circuit theory of banking and finance. In Journal of Banking and Finance (Vol. 25, Issue 5). https://doi.org/10.1016/S0378-4266(00)00100-X
Bui, C., Scheule, H., & Wu, E. (2017). The value of bank capital buffers in maintaining financial system resilience. Journal of Financial Stability, 33, 23–40. https://doi.org/10.1016/j.jfs.2017.10.006
Cao, Y., & Chou, J. Y. (2022). Bank resilience over the COVID-19 crisis: The role of regulatory capital. Finance Research Letters, 48(February), 102891. https://doi.org/10.1016/j.frl.2022.102891
Casu, B., di Pietro, F., & Trujillo-Ponce, A. (2019). Liquidity Creation and Bank Capital. Journal of Financial Services Research, 56(3), 307–340. https://doi.org/10.1007/s10693-018-0304-y
Coffinet, J., Coudert, V., Pop, A., & Pouvelle, C. (2012). Two-way interplays between capital buffers and credit growth: Evidence from French banks. Journal of International Financial Markets, Institutions and Money, 22(5), 1110–1125. https://doi.org/10.1016/j.intfin.2012.05.011
Davydov, D., Fungáčová, Z., & Weill, L. (2018). Cyclicality of bank liquidity creation. Journal of International Financial Markets, Institutions and Money, 55(February 2017), 81–93. https://doi.org/10.1016/j.intfin.2018.02.014
Diamond, D. W., & Rajan, R. G. (2000). A theory of bank capital. Journal of Finance, 55(6), 2431–2465. https://doi.org/10.1111/0022-1082.00296
Distinguin, I., Roulet, C., & Tarazi, A. (2013). Bank regulatory capital and liquidity: Evidence from US and European publicly traded banks. Journal of Banking and Finance, 37(9), 3295–3317. https://doi.org/10.1016/j.jbankfin.2013.04.027
Elnahass, M., Trinh, V. Q., & Li, T. (2021). Global banking stability in the shadow of Covid-19 outbreak. Journal of International Financial Markets, Institutions and Money, 72, 101322. https://doi.org/10.1016/j.intfin.2021.101322
Evans, J. J., & Haq, M. (2021). Does bank capital reduce liquidity creation? Global Finance Journal, January 2020, 100640. https://doi.org/10.1016/j.gfj.2021.100640
Fu, X. M., Lin, Y. R., & Molyneux, P. (2016). Bank capital and liquidity creation in asia pacific. Economic Inquiry, 54(2), 966–993. https://doi.org/10.1111/ecin.12308
Fungáčová, Z., Weill, L., & Zhou, M. (2017). Bank Capital, Liquidity Creation and Deposit Insurance. Journal of Financial Services Research, 51(1), 97–123. https://doi.org/10.1007/s10693-016-0240-7
Greene, W. H. (2018). Econometric Analysis (8th ed.). Pearson Education.
Gupta, J., & Kashiramka, S. (2020). Financial stability of banks in India: Does liquidity creation matter? Pacific Basin Finance Journal, 64(September), 101439. https://doi.org/10.1016/j.pacfin.2020.101439
He, Q., Liu, J., Wang, S., & Yu, J. (2020). The impact of COVID-19 on stock markets. Economic and Political Studies, 4816(May), 1–14. https://doi.org/10.1080/20954816.2020.1757570
Horváth, R., Seidler, J., & Weill, L. (2014). Bank Capital and Liquidity Creation: Granger-Causality Evidence. Journal of Financial Services Research, 45(3), 341–361. https://doi.org/10.1007/s10693-013-0164-4
Le, T. (2019). The interrelationship between liquidity creation and bank capital in Vietnamese banking. Managerial Finance, 45(2), 331–347. https://doi.org/10.1108/MF-09-2017-0337
Li, L., Strahan, P. E., & Zhang, S. (2020). Banks as lenders of first resort: Evidence from the COVID-19 crisis. Review of Corporate Finance Studies, 9(3), 472–500. https://doi.org/10.1093/rcfs/cfaa009
Lindquist, K. G. (2004). Banks’ buffer capital: How important is risk. Journal of International Money and Finance, 23(3), 493–513. https://doi.org/10.1016/j.jimonfin.2004.01.006
Mohanty, S., & Mahakud, J. (2021). Causal Nexus Between Liquidity Creation and Bank Capital Ratio: Evidence from India. Margin: The Journal of Applied Economic Research, 15(2), 205–237. https://doi.org/10.1177/0973801021990399
Narayan, P. K., Gong, Q., & aliahmed, H. J. (2021). Is there a pattern in how COVID-19 has affected Australia’s stock returns? In Applied Economics Letters. https://doi.org/10.1080/13504851.2020.1861190
Nguyen, T. V. H., Ahmed, S., Chevapatrakul, T., & Onali, E. (2020). Do stress tests affect bank liquidity creation? Journal of Corporate Finance, 64(August 2019), 101622. https://doi.org/10.1016/j.jcorpfin.2020.101622
Olivia, S., Gibson, J., & Nasrudin, R. (2020). Indonesia in the Time of Covid-19. Bulletin of Indonesian Economic Studies, 56(2), 143–174. https://doi.org/10.1080/00074918.2020.1798581
Ovi, N., Bose, S., Gunasekarage, A., & Shams, S. (2020). Do the business cycle and revenue diversification matter for banks’ capital buffer and credit risk: Evidence from ASEAN banks. Journal of Contemporary Accounting and Economics, 16(1), 100186. https://doi.org/10.1016/j.jcae.2020.100186
Shim, J. (2013). Bank capital buffer and portfolio risk: The influence of business cycle and revenue diversification. Journal of Banking and Finance, 37(3), 761–772. https://doi.org/10.1016/j.jbankfin.2012.10.002
Toh, M. Y. (2019). Effects of bank capital on liquidity creation and business diversification: Evidence from Malaysia. Journal of Asian Economics, 61, 1–19. https://doi.org/10.1016/j.asieco.2018.12.001
Umar, M., Sun, G., Shahzad, K., & Rao, Z. ur R. (2018). Bank regulatory capital and liquidity creation: evidence from BRICS countries. International Journal of Emerging Markets, 13(1), 218–230. https://doi.org/10.1108/IJoEM-04-2015-0072
Werner, R. A. (2016). A lost century in economics: Three theories of banking and the conclusive evidence. International Review of Financial Analysis, 46, 361–379. https://doi.org/10.1016/j.irfa.2015.08.014
Wooldridge, J. M. (2010). Econometric Analysis of Cross Section and Panel Data (2nd Editio). The MIT Press.
Wooldridge, J. M. (2018). Introductory Econometrics (7th ed.). Cengage Learning, Inc.
Zheng, C., (Wai Kong) Cheung, A., & Cronje, T. (2019). The moderating role of capital on the relationship between bank liquidity creation and failure risk. Journal of Banking and Finance, 108, 105651. https://doi.org/10.1016/j.jbankfin.2019.105651