Bank Liquidity Risk and Performance

Abstract

This study employs an alternative measure of liquidity risk to investigate its determinants by using an unbalanced panel dataset of commercial banks in 12 advanced economies over the period 1994-2006. Dependence on liquid assets for external funding, supervisory and regulatory factors, and macroeconomic factors are all determinants of liquidity risk. Because of higher funding costs for obtaining liquidity, liquidity risk is regarded as a discount for bank profitability, yet liquidity risk shows a premium on bank performance in terms of banks' net interest margins. Liquidity risk has reverse impacts on bank performance in a market-based financial system.