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Liquidity creation, regulatory capital, and bank profitability

Tran, Vuong Thao, Lin, Chien-Ting and Nguyen, Hoa 2016, Liquidity creation, regulatory capital, and bank profitability, International review of financial analysis, vol. 48, pp. 98-109, doi: 10.1016/j.irfa.2016.09.010.

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Title Liquidity creation, regulatory capital, and bank profitability
Author(s) Tran, Vuong Thao
Lin, Chien-Ting
Nguyen, Hoa
Journal name International review of financial analysis
Volume number 48
Start page 98
End page 109
Total pages 12
Publisher Elsevier
Place of publication Amsterdam, The Netherlands
Publication date 2016-12
ISSN 1057-5219
1873-8079
Keyword(s) liquidity creation
regulatory capital
bank profitability
bank size
Summary We examine the interrelationships among liquidity creation, regulatory capital, and bank profitability of US banks. We find that regulatory capital and liquidity creation affect each other positively after controlling for bank profitability. However, this relationship is largely driven by small banks and primarily during non-crisis periods. It is also sensitive to the level of banks' regulatory capital and how it is measured. Furthermore, we find that banks which create more liquidity and exhibit higher illiquidity risk have lower profitability. Finally, the relationship between regulatory capital and bank performance is not linear and depends on the level of capitalization. Regulatory capital is negatively related to bank profitability for higher capitalized banks but positively related to profitability for lower capitalized banks. Therefore, a change in regulatory capital has differential impacts on bank performance. Our findings have various implications for policymakers and bank regulators.
Language eng
DOI 10.1016/j.irfa.2016.09.010
Field of Research 150203 Financial Institutions (incl Banking)
1502 Banking, Finance And Investment
1501 Accounting, Auditing And Accountability
1801 Law
Socio Economic Objective 900101 Finance Services
HERDC Research category C1 Refereed article in a scholarly journal
ERA Research output type C Journal article
Copyright notice ©2016, Elsevier
Persistent URL http://hdl.handle.net/10536/DRO/DU:30088617

Document type: Journal Article
Collection: Department of Finance
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