Bank liquidity and systematic factors in emerging markets

Abstract

This study investigates the impact of systematic factors on bank liquidity creation in emerging markets. We use the method Bouwman (2009) designed to compute liquidity creation measure, where we examine the effect of systematic factors such as the economic growth rate, inflation, interest rates, and the exchange rate on liquidity creation. The study further provides insights into the divergent impacts of systemic factors across different regions. The regions considered are Asia, Latin America, Africa, and Eastern Europe. Using a ten-year data (2013 -2022) from consolidated balance sheets of listed banks, and selected systematic market factors, the study uses the generalized method of moments (GMM) as the estimation technique. The results show that the US dollar exchange rate is the one important systematic factor significantly driving bank liquidity creation in emerging markets. At the regional level, we found inflation to be a significant factor; however, the relationship between systematic factors and bank liquidity creation differs from one region to another. To this effect, the research concludes that banks and policymakers in emerging markets should consider managing factors such as exchange rates and inflation to enhance their performance.