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  • buy Cilengitide br Data and methodology The aim of

    2018-10-22


    Data and methodology The aim of this study is to explore bank specific and macroeconomic factors influencing the liquidity of Indian banks. These variables include: bank specific factors-bank size; deposits; profitability; funding cost; and capital adequacy; and macroeconomic factors – inflation; GDP; and unemployment (Bonfim & Kim, 2012; Bonner et al., 2013; Delechat et al., 2012; Dinger, 2009; Munteanu, 2012; Tseganesh, 2012).
    Result analyses
    Discussion Empirical findings highlight that at 5% significance level, bank size and GDP have a negative relationship with bank liquidity. While profitability, deposits, inflation and capital adequacy ratio have positive impact on liquidity, unemployment and cost of funding have an insignificant effect on bank liquidity. This indicates that bank size, deposits, inflation, GDP, profitability and capital adequacy significantly affect bank liquidity. Dinger (2009), Vodova (2013), Choon et al. (2013), Bonfim and Kim (2012), Bonner et al. (2013) and Delechat et al. (2012) explained that based on the availability of total assets, banks which are small in size are required to hold more liquidity due to limited external sources of funding while large banks hold less liquidity because they buy Cilengitide are able to arrange funds from the inter-bank market and other sources (Bunda & Desquilbet, 2008). Banks are dependent on deposits and external funds for their liquidity needs. When funding cost rises, banks begin to hold more liquidity. Our results suggest that at 5% significance level, cost of funding and unemployment have insignificant impact on bank liquidity. Kashyap and Stein (2000) argued that liquidity buffer and other sources of capital insulated banks from the shock of increased cost of funding. Insignificant impact of cost of funding on bank liquidity suggests that liquidity of Indian banks is not affected by it. This may be due to banks maintaining adequate liquid buffer or capital from other sources. Our analysis show that deposits have a positive impact on bank liquidity, and similar result is found in the studies by Bonner et al. (2013). Capital adequacy showed a coefficient of 0.13 and p value of 0.02, exhibiting a statistically positive impact on bank liquidity. Similar results were found from studies by Vodova (2011), Vodova (2013) and Tseganesh, (2012). According to Diamond and Rajan (2001), capital structure of banks becomes less fragile when there is adequate capital buffer. Berger and Bouwman (2009) stated that according to the risk absorption concept, capital has a positive effect on bank liquidity. This implies that high level of capital permits more liquidity creation. Holding liquidity is difficult for banks as no income is generated by liquid assets. But, it is obligatory to hold liquidity because if a situation of unpredicted customer demand arises, banks may face a liquidity stress which might lead to a crisis in the banking system as a whole. The results of this study stated that bank liquidity increased with an increase in the capital adequacy ratio. With the probability of 0.00, profitability significantly and positively affected bank liquidity. Similar results were reported by Vodova (2013) and Lartey et al. (2013). Profitability of banks could be increased from investment in risky assets, but due to the risk involved in the investment, adequate liquid buffer is needed. Gross domestic product and inflation have coefficient value of −0.10 and 0.29. At 5% significance level, both the macroeconomic variables significantly determine bank liquidity. There are various studies on gross domestic product and its impact on bank liquidity. Among these studies, Aspachs et al. (2005), Chen and Phuong (2013), Vodova (2011) and Dinger (2009) emphasized that GDP had a negative impact on bank liquidity. On the other hand, Bhati et al. (2015), Choon et al. (2013), Moussa (2015) and Bunda and Desquilbet (2008) affirmed a positive impact of GDP on liquidity of banks.