Bank Market Power and Liquidity: Evidence from 113 Developed and Developing Countries

Posted: 28 Aug 2012 Last revised: 20 Jul 2013

See all articles by My Nguyen

My Nguyen

RMIT- School of Economics, Finance and Marketing

Michael T. Skully

Monash University - Department of Banking and Finance; Financial Research Network (FIRN)

Shrimal Perera

Monash University - Department of Accounting and Finance; Financial Research Network (FIRN)

Date Written: October 31, 2012

Abstract

This paper investigates the association between market power and bank liquidity across 113 developed and developing countries. Using bank-level measures of market power (both a conventional and a funding-adjusted Lerner index) and Generalised Methods of Moments estimators, we find an inverse U-shaped relation between bank market power and liquidity. It shows that with initial increases in market power, banks hold more liquid assets, attract more non-transaction deposits and are net lenders in the interbank market. When market power exceeds a certain threshold, however, banks invest less in liquid assets, attract more transaction deposits and become net borrowers in the interbank market. We also find that for a given level of market power, ceteris paribus, banks in developed nations have lower investment in asset liquidity, attract more transaction deposits and obtain more funding through the interbank market than their developing country counterparts. These results are consistent across all models.

Keywords: Market power, bank liquidity, Lerner index

JEL Classification: C33, G21, G28, O23

Suggested Citation

Nguyen, My and Skully, Michael T. and Perera, Shrimal, Bank Market Power and Liquidity: Evidence from 113 Developed and Developing Countries (October 31, 2012). 25th Australasian Finance and Banking Conference 2012, Available at SSRN: https://ssrn.com/abstract=2136743 or http://dx.doi.org/10.2139/ssrn.2136743

My Nguyen (Contact Author)

RMIT- School of Economics, Finance and Marketing ( email )

445 Swanston Street
Melbourne, Victoria 3001
Australia
+61 3 9925 5450 (Phone)

Michael T. Skully

Monash University - Department of Banking and Finance ( email )

900 Dandenong Road
Caulfield East, Victoria 3145
Australia
+61 3 9903 2407 (Phone)
+61 3 9903 1443 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Shrimal Perera

Monash University - Department of Accounting and Finance ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

HOME PAGE: http://www.buseco.monash.edu.au/aaf/staff/perera.html

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
1,421
PlumX Metrics