Liquidity Hazard Model for Class I and Class II Banks Pre and Post the Global Financial and Covid-19 Health Crisis: A Pooled OLS Regression Panel Approach
Downloads
There have been various debates on how the performance of economies can be analysed and monitored over time. Such attempts aim to drive a conclusion as to what works for economic growth and development. What may work in one region for a given economy might not apply in another. One of the most important factors to consider are external variables which tend to have a huge impact on the way in which an economy reacts to a given shock. Economic shocks can take different forms such as the 2007-2010 financial crisis or the 2019-2022 Covid-19 health pandemic which had huge trickle-down effect on the economies. This article focuses on the liquidity hazard model for class I and II banks before and after the financial crisis. The study used a pooled OLS regression model using panel analysis. The results showed that regression is statistically significant for BDR, LCR and NSFR with F-statistic given as 7.787 and P < 0.05. About 21% of the variation in Interest income was explained by the model. The NSFR has a positive impact on II while BDR, LCR, LIBOR OIS and ROA had a negative impact. The liquidity hazard model, particularly the Diamond–Dybvig framework, continues to provide valuable insights into the vulnerabilities of banks. While regulatory measures like Basel III have strengthened liquidity requirements, the evolving nature of banking, influenced by technological advancements and changing depositor behaviours, necessitates continuous adaptation of models and regulations to safeguard financial stability.
Barth, J. R., Lu, W., & Sun, Y. (2020). Regulatory Restrictions on US Bank Funding Sources: A Review of the Treatment of Brokered Deposits. Journal of Risk and Financial Management, 13(6), Article 6. https://doi.org/10.3390/jrfm13060130
Ernst, C., Stange, S., & Kaserer, C. (2009). Measuring Market Liquidity Risk—Which Model Works Best? (SSRN Scholarly Paper 1328480). https://doi.org/10.2139/ssrn.1328480
Diamond DW, Dybvig PH (1983). "Bank runs, deposit insurance, and liquidity". Journal of Political Economy. 91 (3): 401–419. CiteSeerX 10.1.1.434.6020
Gefang, D., Koop, G., & Potter, S. M. (2011). Understanding liquidity and credit risks in the financial crisis. Journal of Empirical Finance, 18(5), 903–914. https://doi.org/10.1016/j.jempfin.2011.07.006
King, M. R. (2013). The Basel III Net Stable Funding Ratio and bank net interest margins. Journal of Banking & Finance, 37(11), 4144–4156. https://doi.org/10.1016/j.jbankfin.2013.07.017
Le, M., Hoang, V.-N., Wilson, C., & Managi, S. (2020). Net stable funding ratio and profit efficiency of commercial banks in the US. Economic Analysis and Policy, 67, 55–66. https://doi.org/10.1016/j.eap.2020.05.008
Lu, W., & Whidbee, D. A. (2013). Bank structure and failure during the financial crisis. Journal of Financial Economic Policy, 5(3), 281–299. https://doi.org/10.1108/JFEP-02-2013-0006
Mpundu M, M. A. Petersen, J. Mukuddem-Petersen, and F. Gideon Volume (2013), Basel III and Asset Securitization, Discrete Dynamics in Nature and Society, vol 2013, Article ID 439305, 19 pages, http://dx.doi.org/10.1155/2013/439305
Mpundu, M. (2016), A Dynamic Model Approach of Securitization and the Financial Crisis, International Journal of Economics and Financial Issues, 6(4), 1873-1883, https://econjournals.com/index.php/ijefi/article/view/2766
Mpundu, M. (2017). Analysis of Bank Failure: An Application of CVAR Methodology on Liquidity. Risk Governance and Control: Financial Markets and Institutions, 7(2), 18-27. http://dx.doi.org/10.22495/rgcv7i2art2
Munther AI Nimer, Warrad, D. L., & Rania AI Omari. (2015). The Impact of Liquidity on Jordanian Banks Profitability through Return on Assets. European Journal of Business and Management. https://www.researchgate.net/publication/393047997_The_Impact_of_Liquidity_on_Jordanian_Banks_Profitability_through_Return_on_Assets
Ooka, E., Nagano, T., & Baba, N. (2006). Recent Development of the OIS (Overnight Index Swap) Market in Japan.
Rossi, C. V. (n.d.). Decomposing the Impact of Brokered Deposits on Bank Failure: Theory and Practice.
Ruozi, R., & Ferrari, P. (2013). Liquidity Risk Management in Banks: Economic and Regulatory Issues. In R. Ruozi & P. Ferrari (Eds.), Liquidity Risk Management in Banks: Economic and Regulatory Issues (pp. 1–54). Springer. https://doi.org/10.1007/978-3-642-29581-2_1
Shahchera, M., & Taheri, M. (2017). Liquidity Coverage Ratio, Ownership, Stability: Evidence from Iran. 12(2).
Sidhu, A. V., Rastogi, S., Gupte, R., & Bhimavarapu, V. M. (2022). Impact of Liquidity Coverage Ratio on Performance of Select Indian Banks. Journal of Risk and Financial Management, 15(5), Article 5.
https://doi.org/10.3390/jrfm15050226
Sidhu, A. V., Rastogi, S., Gupte, R., Rawal, A., & Agarwal, B. (2022). Net Stable Funding Ratio (NSFR) and Bank Performance: A Study of the Indian Banks. Journal of Risk and Financial Management, 15(11), Article 11. https://doi.org/10.3390/jrfm15110527
Singh, A., & Sharma, A. K. (2016). An empirical analysis of macroeconomic and bank-specific factors affecting liquidity of Indian banks. Future Business Journal, 2(1), 40–53. https://doi.org/10.1016/j.fbj.2016.01.001
Sitepu, R. W. (2020). FACTORS AFFECTING LIQUIDITY COVERAGE RATIO (LCR) AS IMPLEMENTATION OF BASEL III IN THE BANKING SECTOR.
Smith, D. (2013). Valuing Interest Rate Swaps Using Overnight Indexed Swap (OIS) Discounting. The Journal of Derivatives, 20, 49–59. https://doi.org/10.3905/jod.2013.20.4.049
Snider, C. A., & Youle, T. (2010). Does the LIBOR Reflect Banks’ Borrowing Costs? (SSRN Scholarly Paper 1569603). https://doi.org/10.2139/ssrn.1569603
Tammenga, A., & Haarman, P. (2020). Liquidity risk regulation and its practical implications for banks: The introduction and effects of the Liquidity Coverage Ratio. Maandblad Voor Accountancy En Bedrijfseconomie, 94(9/10), Article 9/10. https://doi.org/10.5117/mab.94.51137
Copyright (c) 2025 Mubanga Mpundu (Author)
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
By submitting your manuscript to IJABS, you agree and confirm that the paper you have submitted is your own original and unpublished work, does not contain any defamatory or other unlawful content(s), and you will accept responsibility for plagiarism. You and your co-authors retain copyright and grant BESRA the right of publication, with the work simultaneously licensed under a Creative Commons Attribution License 4.
