The Determinants of Bank Liquidity
22 Pages Posted: 4 Apr 2013
Date Written: December 2012
This study investigates the determinants of banks liquidity. There are two category of bank liquidity in this study that is precautionary and involuntary. The definition of precautionary liquidity is the ratio of total cash, demand deposit at central bank, and demand deposit at other banks, to total asset. Whilst the definition of involuntary liquidity is the ratio of total traded securities of central bank, government, and others, to total asset. The study indicates that credit, saving and deposit affect precautionary liquidity. This reflects that operational bank activities influence precautionary liquidity. In contrast, financial system and macroeconomic conditions have an effect on involuntary liquidity. The lag or historical liquidity of both liquidities, precautionary and involuntary, are strongly determined each of them. In addition, financial system and macroeconomic condition significantly influence small banks liquidity in precautionary and involuntary. Monetary policy, by means of reserve requirement affects only small bank’s precautionary liquidity. Furthermore, indirect monetary policy through interest rate policy does not significantly have influence on banks liquidity.
Keywords: Banking, Liquidity, General Method Moment
JEL Classification: G21, G11, C33
Suggested Citation: Suggested Citation