Academic journal article Business: Theory and Practice

Bank Liquidity and Financial Performance: Evidence from Moroccan Banking Industry

Academic journal article Business: Theory and Practice

Bank Liquidity and Financial Performance: Evidence from Moroccan Banking Industry

Article excerpt

Introduction

The financial turmoil of 2007 revealed the importance of the sound liquidity risk management. Thus, the crisis that was caused by a credit crisis was transformed into a liquidity crisis. The financial crisis of 2007, also called subprime crisis begin in the first half of 2007 with the crash of the credit quality of US subprime residential mortgages. Indeed, the decline in housing prices in the United States led to an increase in delinquencies in mortgage lending that triggered a liquidity crisis in 2007. However, the financial crisis was not only limited to bank bankruptcies, quasi-bankruptcies, nationalizations and a decline of financial performance of large financial institutions. The financial crisis also caused a deterioration of international stock markets, a drying of liquidity in interbank markets and spilled over into a sovereign debt crisis in several European countries in early 2010 (Greece, Portugal, Ireland, Italy and Spain) (Moro 2013). Economists and policymakers who was concentrated on causes and consequences of global excess liquidity before the crisis, focused on liquidity of financial institutions, mainly banks after 2007 (Gersi, Komarkova 2009).

Considered as the most severe financial crisis since the Great Depression (Brunnermeier 2009), the global financial crisis has demonstrated the importance of establishing a level of liquidity sufficient to cope with adverse conditions. These tensions in the financial markets have highlighted serious flaws in the methods of management of liquidity risk of individual banks. Liquidity is defined as the ability of a bank to fund increases in assets and meet obligations as they come due, without incurring unacceptable losses (Basel Committee on Banking Supervision 2008). Thus, the Third Basel Accord has reviewed the banking practices in risk management due to the subprime crisis, in order to strengthen the financial system. These agreements have given rise to two main ratios: "Liquidity Coverage Ratio (LCR) which aims to ensure that abank maintains an adequate level of unencumbered, high-quality liquid assets that can be converted into cash to meet its liquidity needs for a 30 calendar day time horizon under a significantly severe liquidity stress scenario specified by supervisors, and Net Stable Funding Ratio (NSFR) which aims to ensure that long term assets are funded with at least a minimum amount of stable liabilities in relation to their liquidity risk profiles" (Basel Committee on Banking Supervision 2010).

The first studies on liquidity risk were mainly focused on bank runs and financial crisis (Diamond, Dybvig 1983). Researchers and practitioners were then interested in the relationship between the risk of liquidity and bank performance. According to the European Central Bank, bank's performance is the capacity to generate sustainable profitability which is essential for banks to maintain ongoing activity and for its investors to obtain fair returns; and crucial for supervisors, as it guarantees more resilient solvency ratios, even in the context of a riskier business environment (European Central Bank 2010).

Most of the empirical papers on the relationship between banks' performance and banks' liquidity examine European and Asian banks. Thus, in Europe, Molyneux and Thornton (1992) examine the determinants of bank performance of eighteen European countries between 1986 and 1989. Results show that the ratio of liquid assets to total assets is negatively related to return on assets ROA. Kosmidou et al. (2005) analyze the UK commercial banking industry over the period 1995-2002 and investigate the impact of banlds characteristics, macroeconomic conditions and financial market structure on bank's net interest margin and return on average assets ROAA. Results show that the ratio of liquid assets to customer and short term funding is positively related to return on average assets ROAA and negatively related to net interest margins NIM. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.