How Does Credit Risk Influence Liquidity Risk? Evidence from Ukrainian Banks

Abstract

This study investigates the link between two major risks in the banking sector: liquidity risk and credit risk. Utilizing a novel sample of Ukrainian banks for the period from Q1 2009 to Q4 2015, we document credit risk as having a positive relationship with liquidity risk. Our findings suggest banks with a high level of non-performing loans might not meet depositors’ withdrawal demands, which could lower cash flow and trigger depreciation in loan assets and consequently increase liquidity risk. Furthermore, we find this positive relationship between credit risk and liquidity risk is more pronounced in foreign banks and large banks. Our results are robust with respect to alternative measures of bank risks.