Determinants of liquidity risk: Empirical evidence from Indian commercial banks

  • Received June 13, 2023;
    Accepted August 4, 2023;
    Published August 15, 2023
  • Author(s)
  • DOI
    http://dx.doi.org/10.21511/bbs.18(3).2023.09
  • Article Info
    Volume 18 2023, Issue #3, pp. 101-111
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Liquidity risk is a significant financial threat that must be handled carefully. Underestimation or mismanagement of liquidity risk may lead to severe financial losses or even bank failures. Therefore, timely and adequately estimating liquidity risk and examining factors that affect liquidity risk are essential. On that account, this paper aims to examine the determinants of liquidity risk for Indian commercial banks from 2013 to 2022. For this purpose, the study has employed a panel data regression model with pooled OLS, fixed effect, and random effect methods and has considered bank-specific and macroeconomic variables. The findings show that liquidity risk is affected by both bank-specific variables and macroeconomic variables. Bank-specific variables, such as bank age, have a negative impact on liquidity risk at the 1 percent significance using pooled OLS, FE, and RE models. In contrast, bank size and bank capitalization positively impacted liquidity risk. However, the operational efficiency of banks was found to have no significant impact on liquidity risk using both the liquid asset to total assets ratio and the loan to deposit ratio. In addition, the results show that macroeconomic variables such as GDP and inflation have a positive impact on liquidity risk. The study’s findings are expected to assist various stakeholders in making appropriate policies, decisions and managing their liquidity risk.

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    • Table 1. Definitions of commercial banks’ liquidity risk variables
    • Table 2. Summary statistics
    • Table 3. Pearson correlation matrix
    • Table 4. VIF
    • Table 5. Estimations results (dependent variable is LTA)
    • Table 6. Estimations results (dependent variable is LDT)
    • Conceptualization
      Tisa Maria Antony
    • Data curation
      Tisa Maria Antony
    • Formal Analysis
      Tisa Maria Antony
    • Investigation
      Tisa Maria Antony
    • Methodology
      Tisa Maria Antony
    • Resources
      Tisa Maria Antony
    • Software
      Tisa Maria Antony
    • Supervision
      Tisa Maria Antony
    • Validation
      Tisa Maria Antony
    • Visualization
      Tisa Maria Antony
    • Writing – original draft
      Tisa Maria Antony
    • Writing – review & editing
      Tisa Maria Antony