The Impact of Bank Liquidity on Bank Risk Taking: Do High Capital Buffers and Big Banks Help or Hinder?

45 Pages Posted: 19 Aug 2014 Last revised: 9 Jun 2019

See all articles by Muhammad Saifuddin Khan

Muhammad Saifuddin Khan

University of Technology Sydney (UTS) - School of Finance and Economics; University of Dhaka - Department of Finance

Harald (Harry) Scheule

University of Technology Sydney (UTS) - School of Finance and Economics; Financial Research Network

Eliza Wu

The University of Sydney - Business School; Financial Research Network (FIRN)

Date Written: July 31, 2015

Abstract

This study examines the impact of bank liquidity on bank risk taking. Using quarterly data for U.S. bank holding companies from 1986 to 2014 we find evidence to support that more liquid banks take more risk. This key result is robust for alternative bank risk and liquidity proxies, including some new liquidity measures advocated under the Basel III regulatory framework. An increase in banks’ short-term liquidity increases banks’ non-performing assets, risk-weighted assets and stock return volatility. The relation is stronger for banks with high capital buffers and in the high liquidity post-GFC era. However, our results show that bank size usually limits banks from taking more risk when they are flushed with liquidity but this was not the case during the more recent post-GFC high liquidity sub-period. The findings of this study have implications for bank regulators advocating greater liquidity and capital requirements for banks under Basel III.

Keywords: Liquidity, bank risk, asset risk, liquidity risk, capital buffer, bank size

JEL Classification: G21, G01, G18

Suggested Citation

Khan, Muhammad Saifuddin and Scheule, Harald and Wu, Eliza, The Impact of Bank Liquidity on Bank Risk Taking: Do High Capital Buffers and Big Banks Help or Hinder? (July 31, 2015). 27th Australasian Finance and Banking Conference 2014 Paper, Available at SSRN: https://ssrn.com/abstract=2481887 or http://dx.doi.org/10.2139/ssrn.2481887

Muhammad Saifuddin Khan (Contact Author)

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

Haymarket
Sydney, NSW 2007
Australia
+61406520897 (Phone)

University of Dhaka - Department of Finance ( email )

Department of Finance
University of Dhaka
Dhaka, 1000
Bangladesh

Harald Scheule

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

P.O. Box 123
Broadway, NSW 2007
Australia

HOME PAGE: http://https://www.uts.edu.au/staff/harald.scheule

Financial Research Network ( email )

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

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

Eliza Wu

The University of Sydney - Business School ( email )

University of Sydney
Darlington
Sydney, NSW 2006
Australia

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

Downloads
265
Abstract Views
1,655
rank
130,868
PlumX Metrics