The impacts of liquidity creation on banking stability: An empirical research in ASEAN-5

Abstract

Using both GMM estimation and Bayesian approaches during the period from 2007 to 2021 to examine the impacts of liquidity creation (LC) on bank stability (BS) in a sample of 53 banks across five Southeast Asian countries (ASEAN-5), the author has become a pioneer in conducting the first empirical study applying these two approaches, which provides a broader perspective on the effects of liquidity creation on bank stability. Utilizing CatFat and CatNonFat indexes, the author follows the method of Berger and Bouwman [1] to represent the ability to create liquidity based on a sample of 794 observations from banks in Indonesia, Malaysia, the Philippines, Vietnam, and Thailand. The positive impacts of LC on financial stability revealed by both approaches have contributed important management implications to the banking industry in ASEAN-5 in particular and to emerging and developing economies in general. The research also enriches the literature on the relationship between LC and BS. Not only new empirical insights but also the complex nature of the correlation between bank stability (a critical feature of the banking system) and liquidity creation (a fundamental function) have been revealed. Additionally, the author has identified factors affecting BS in the research sample, which is critically important for the supervision and management of the banking industry in ASEAN. By analyzing the impact of liquidity creation on banks’ stability, the author hopes to contribute important implications for banking supervision and management activities in ASEAN, especially in emerging and developing economies.