Bank solvency: The role of credit and liquidity risks, regulatory capital and economic stability

Banking stability is essential to any economy due to its many functions, including intermediation, payment facilitation, and credit creation. Thus, the stability of the banking industry is one of the critical ingredients in economic growth. This paper analyzes how bank capital requirements, credit,...

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Autor principal:	Isaiah Oino
Formato:	article
Lenguaje:	EN
Publicado:	LLC "CPC "Business Perspectives" 2021
Materias:	banks capital efficiency GDP profitability risks Banking HG1501-3550
Acceso en línea:	https://doaj.org/article/a74cb9d0f36c4f5787d216f4d7acfc73
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spelling	oai:doaj.org-article:a74cb9d0f36c4f5787d216f4d7acfc732021-11-22T11:26:31ZBank solvency: The role of credit and liquidity risks, regulatory capital and economic stability10.21511/bbs.16(4).2021.081816-74031991-7074https://doaj.org/article/a74cb9d0f36c4f5787d216f4d7acfc732021-11-01T00:00:00Zhttps://www.businessperspectives.org/images/pdf/applications/publishing/templates/article/assets/15832/BBS_2021_04_Oino.pdfhttps://doaj.org/toc/1816-7403https://doaj.org/toc/1991-7074Banking stability is essential to any economy due to its many functions, including intermediation, payment facilitation, and credit creation. Thus, the stability of the banking industry is one of the critical ingredients in economic growth. This paper analyzes how bank capital requirements, credit, and liquidity impact bank solvency using ten major banks that control 90% of the market share in the UK in 2009–2018. The GMM model indicates a strong association between credit and liquidity risks. That is, when banks finance a risky or distressed project, this will lead to an increase in non-performing loans (NPL), which reduces bank liquidity. Poor liquidity profile of the bank may restrict it from providing financial intermediation role. In addition, the findings indicate that efficiency, asset quality, and economic growth have a significant positive effect on the solvency of banks. The results also show that the regulatory capital (tier1) has a positive significant influence on solvency of the banks. Further, the results indicate that during the economic boom, banks tend to increase their regulatory capital. Therefore, there is a need to ensure that during the “good time”, banks can accumulate enough capital that is genuinely capable of absorbing negative shock. Also, it is important for banks to ensure that they are efficient but also have robust credit appraisal system to reduce NPL. This paper also demonstrates the implication of increased capital requirements. That is, increased capital requirements ensure not only banks are liquid but also solvent which enables them to provide financial intermediation.Isaiah OinoLLC "CPC "Business Perspectives"articlebankscapitalefficiencyGDPprofitabilityrisksBankingHG1501-3550ENBanks and Bank Systems, Vol 16, Iss 4, Pp 84-100 (2021)
institution	DOAJ
collection	DOAJ
language	EN
topic	banks capital efficiency GDP profitability risks Banking HG1501-3550
spellingShingle	banks capital efficiency GDP profitability risks Banking HG1501-3550 Isaiah Oino Bank solvency: The role of credit and liquidity risks, regulatory capital and economic stability
description	Banking stability is essential to any economy due to its many functions, including intermediation, payment facilitation, and credit creation. Thus, the stability of the banking industry is one of the critical ingredients in economic growth. This paper analyzes how bank capital requirements, credit, and liquidity impact bank solvency using ten major banks that control 90% of the market share in the UK in 2009–2018. The GMM model indicates a strong association between credit and liquidity risks. That is, when banks finance a risky or distressed project, this will lead to an increase in non-performing loans (NPL), which reduces bank liquidity. Poor liquidity profile of the bank may restrict it from providing financial intermediation role. In addition, the findings indicate that efficiency, asset quality, and economic growth have a significant positive effect on the solvency of banks. The results also show that the regulatory capital (tier1) has a positive significant influence on solvency of the banks. Further, the results indicate that during the economic boom, banks tend to increase their regulatory capital. Therefore, there is a need to ensure that during the “good time”, banks can accumulate enough capital that is genuinely capable of absorbing negative shock. Also, it is important for banks to ensure that they are efficient but also have robust credit appraisal system to reduce NPL. This paper also demonstrates the implication of increased capital requirements. That is, increased capital requirements ensure not only banks are liquid but also solvent which enables them to provide financial intermediation.
format	article
author	Isaiah Oino
author_facet	Isaiah Oino
author_sort	Isaiah Oino
title	Bank solvency: The role of credit and liquidity risks, regulatory capital and economic stability
title_short	Bank solvency: The role of credit and liquidity risks, regulatory capital and economic stability
title_full	Bank solvency: The role of credit and liquidity risks, regulatory capital and economic stability
title_fullStr	Bank solvency: The role of credit and liquidity risks, regulatory capital and economic stability
title_full_unstemmed	Bank solvency: The role of credit and liquidity risks, regulatory capital and economic stability
title_sort	bank solvency: the role of credit and liquidity risks, regulatory capital and economic stability
publisher	LLC "CPC "Business Perspectives"
publishDate	2021
url	https://doaj.org/article/a74cb9d0f36c4f5787d216f4d7acfc73
work_keys_str_mv	AT isaiahoino banksolvencytheroleofcreditandliquidityrisksregulatorycapitalandeconomicstability
_version_	1718417752463507456

Bank solvency: The role of credit and liquidity risks, regulatory capital and economic stability

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