1. bookVolume 22 (2022): Edizione 1 (June 2022)
Dettagli della rivista
License
Formato
Rivista
eISSN
1898-0198
Prima pubblicazione
06 May 2008
Frequenza di pubblicazione
2 volte all'anno
Lingue
Inglese
access type Accesso libero

The Nexus Between Bank Credit Risk and Liquidity: Does the Covid-19 Pandemic Matter? A Case of the Oligopolistic Banking Sector

Pubblicato online: 18 Jun 2022
Volume & Edizione: Volume 22 (2022) - Edizione 1 (June 2022)
Pagine: 152 - 171
Ricevuto: 28 Jan 2022
Accettato: 05 Apr 2022
Dettagli della rivista
License
Formato
Rivista
eISSN
1898-0198
Prima pubblicazione
06 May 2008
Frequenza di pubblicazione
2 volte all'anno
Lingue
Inglese
Abstract

Background: There is a raging debate on how the COVID-19 pandemic disrupted the financial market environments, affected the banks’ strength as the credit channel, and the nexus between market liquidity and credit risk. During the COVID-19 crisis in the banking sector, credit risk and liquidity risk cannot be ignored as they have a considerable bearing on the performance and survival of banks.

Purpose: Within the context of COVID-19, bank-specific and external factors were examined to determine the relationship between liquidity and the credit risk of South African domiciled banks.

Research methodology: Quarterly panel data from 13 South African domiciled banks from 2018 to 2021 were examined using panel data methodologies: fixed effects and the system GMM.

Results: In an analysis of the period between 2019Q1 to 2021Q1 the results suggest a positive relationship between liquidity and credit risk, the COVID-19 pandemic was found to have an implication on the nexus as the COVID-19 dummy variable was significant. Also, the results show that liquidity deteriorated with an increase in COVID-19 cases during the pandemic period. During the Pre-COVID-19 liquidity improved with a decrease in credit risk. Nevertheless, during COVID-19 liquidity was not influenced by credit risk. The results are contrary to the pre-COVID-19 period as the government interventions to support households and non-financial firms could have changed the dynamics of liquidity and loan losses.

Novelty: The pandemic has ushered in a novel set of responses whose lasting impacts are not yet certain. The originality of the article lies in the nature of the investigation, where the nexus between liquidity and credit risk under the COVID-19 shocks/pandemic set-up. This is a unique study as the study revealed that policymakers and researchers alike should pay particular attention to the vulnerabilities to shocks from within and outside of the financial system as COVID-19 was found to significantly affect liquidity and credit risk. Since the pandemic is still active, further research is necessary to examine the cointegrating and causal relationship in the long run.

Keywords

JEL Classification

Acharya, V., Naqvi, H. (2012). The seeds of a crisis: A theory of bank liquidity and risk-taking over the business cycle. Journal of Financial Economics, 106 (2), 349–366. DOI: 10.1016/j.jfineco.2012.05.014. Apri DOISearch in Google Scholar

Acosta Smith, J., Arnould, G., Milonas, K., Vo, Q.A. (2019). Capital and liquidity interaction in banking. DOI: 10.2139/ssrn.3508662. Apri DOISearch in Google Scholar

Al-Awadhi, A.M., Alsaifi, K., Al-Awadhi, A., Alhammadi, S. (2020). Death and contagious infectious diseases: Impact of the COVID-19 virus on stock market returns. Journal of Behavioral and Experimental Finance, 27, 100326. DOI: 10.1016/j.jbef.2020.100326. Apri DOISearch in Google Scholar

Allen, F., Santomero, A.M. (1997). The theory of financial intermediation. Journal of Banking & Finance, 21 (11–12), 1461–1485. DOI: 10.1016/S0378-4266(97)00032-0. Apri DOISearch in Google Scholar

Basel Committee on Banking Supervision, BCBS (2008). Principles for sound liquidity risk management and supervision. Retrieved from http://www.bis.org/publ/bcbs144.pdf (16.08.2021). Search in Google Scholar

Bloom, D.E., David, C. (2004). Epidemics and economics. Interactions between Global Change and Human Health (Scripta Varia). Vol. 106, 304–331. Search in Google Scholar

Bloom, D.E., Daniel, C., Sevilla, J.P. (2018). Epidemics and economics: New and resurgent infectious diseases can have far-reaching economic repercussions. Finance and Development, 55 (2), 46–49. Search in Google Scholar

Bhorat, H., Köhler, T. (2020). Lockdown economics in South Africa: Social assistance and the Ramaphosa stimulus package. AFRICA Focus, p.1. Brookings Institute. Washington, DC. Search in Google Scholar

Borio, C., Gambacorta, L. (2017). Monetary policy and bank lending in a low-interest rate environment: diminishing effectiveness? Journal of Macroeconomics, 54, 217–231.10.1016/j.jmacro.2017.02.005 Search in Google Scholar

Bryant, J. (1980). A model of reserves, bank runs and deposit insurance. Journal of Banking & Finance, 4, 335–344. DOI: 10.1016/j.jmacro.2017.02.005. Apri DOISearch in Google Scholar

De Hoyos, R.E., Sarafidis, V. (2006). Testing for cross-sectional dependence in panel-data models. The Stata Journal, 6 (4), 482–496. Retrieved from https://www.stata-journal.com/abstracts/st0113.pdf. Search in Google Scholar

Diamond, D.W., Dybvig, P.H. (1983). Bank runs, deposit insurance, and liquidity. Journal of political-economy, 91 (3), 401–419. Retrieved from http://www.jstor.org/page/info/about/policies/terms.jsp. Search in Google Scholar

Ejoh, N., Okpa, I., Inyang, E. (2014). The relationship and effect of credit and liquidity risk on bank default risk among deposit money banks in Nigeria. Research Journal of Finance and Accounting, 5 (16), 142–150. Search in Google Scholar

Goodell, J.W. (2020). COVID-19 and finance: Agendas for future research. Finance Research Letters, 35, 101512.10.1016/j.frl.2020.101512 Search in Google Scholar

Fan, V.Y., Jamison, D.T., Summers, L.H. (2018). Pandemic risk: how large are the expected losses? Bulletin of the World Health Organization, 96 (2), 129.10.2471/BLT.17.199588 Search in Google Scholar

Hassan, M.K., Khan, A., Paltrinieri, A. (2019). Liquidity risk, credit risk and stability in Islamic and conventional banks. Research in International Business and Finance, 48, 17–31. DOI: 10.1016/j.ribaf.2018.10.006. Apri DOISearch in Google Scholar

Holmström, B., Tirole, J. (1998). Private and public supply of liquidity. Journal of Political Economy, 106 (1), 1–40.10.1086/250001 Search in Google Scholar

https://voxeu.org/article/credit-during-crisis-bond-lending-channel-monetary-policy (20.08.2021). Search in Google Scholar

Imbierowicz, B., Rauch, C. (2014). The relationship between liquidity risk and credit risk in banks. Journal of Banking & Finance, 40, 242–256. DOI: 10.1016/j.jbankfin.2013.11.030. Apri DOISearch in Google Scholar

International Monetary Fund (2020). POLICY RESPONSES TO COVID-19. Retrieved from https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19#S (24.03.2022). Search in Google Scholar

International Monetary Fund (2021). Retrieved from https://www.imf.org/en/home. Search in Google Scholar

Lagoarde-Segot, T., Leoni, P.L. (2013). Pandemics of the poor and banking stability. Journal of Banking & Finance, 37 (11), 4574–4583.10.1016/j.jbankfin.2013.04.004 Search in Google Scholar

Marozva, G., Magwedere, M.R. (2021). COVID-19 and Stock Market Liquidity: An Analysis of Emerging and Developed Markets. Scientific Annals of Economics and Business 68 (2). DOI: 10.47743/saeb-2021-0010. Apri DOISearch in Google Scholar

Mckinsey (2020). Managing and monitoring credit risk after the COVID-19 pandemic. Retrieved from https://www.mckinsey.com/business-functions/risk/our-insights/managing-and-monitoring-credit-risk-after-the-COVID-19-pandemic (13.08.2021). Search in Google Scholar

Nikomaram, H., Taghavi, M., Diman, S.K. (2013). The relationship between liquidity risk and credit risk in Islamic banking industry of Iran. Management Science Letters, 3, 1223–1232. DOI: 10.5267/j.msl.2013.02.025. Apri DOISearch in Google Scholar

Olds, T., Steenkamp, D. (2021). Estimates of bank-level funding costs in South Africa. Working Paper (No. 857). Economic Research Southern Africa. Retrieved from https://econrsa.org/system/files/publications/working_papers/working_paper_857.pdf. Search in Google Scholar

Our World in Data (2021). Coronavirus (COVID-19) Vaccinations. Retrieved from https://ourworldindata.org/COVID-vaccinations (16.08.2021). Search in Google Scholar

Pesaran, M.H. (2021). General diagnostic tests for cross-sectional dependence in panels. Empirical Economics, 60, 13–50. DOI: 10.1007/s00181-020-01875-7. Apri DOISearch in Google Scholar

Salachas, E.N., Laopodis, N.T., Kouretas, G.P. (2017). The bank-lending channel and monetary policy during pre-and post-2007 crisis. Journal of International Financial Markets, Institutions and Money, 47, 176–187. DOI: 10.1016/j.intfin.2016.10.003. Apri DOISearch in Google Scholar

Saleh, I., Abu Afifa, M. (2020). The effect of credit risk, liquidity risk and bank capital on bank profitability: Evidence from an emerging market. Cogent Economics & Finance, 8 (1), 1814509. DOI: 10.1080/23322039.2020.1814509. Apri DOISearch in Google Scholar

Shin, D., Kim, B. (2015). Liquidity and credit risk before and after the global financial crisis: Evidence from the Korean corporate bond market. Pacific-Basin Finance Journal, 33, 38–61. DOI: 10.1016/j.pacfin.2015.03.003. Apri DOISearch in Google Scholar

South African Reserve Bank (SARB) (2020). Note-on-South-African-liquidity-measures. Retrieved from https://www.resbank.co.za/content/dam/sarb/publications/quarterly-bulletins/articles-and-notes/2020/10089/Note-on-South-african-liquidity-measures.pdf (4.09.2021). Search in Google Scholar

South African Reserve Bank (2021). Financial Stability Review. Retrieved from https://www.resbank.co.za/en/home/publications/review/financial-stability-review/First-Edition-2021-Financial-Stability-Review (16.08.2021). Search in Google Scholar

Statistics South Africa (2020). Steep slump in GDP as COVID-19 takes its toll on the economy. Retrieved from http://www.statssa.gov.za/?p=13601. Search in Google Scholar

Stiglitz, J.E., Weiss, A. (1992). Asymmetric information in credit markets and its implications for macro-economics. Oxford Economic Papers, 44 (4), 694–724. Retrieved from https://www.jstor.org/stable/2663385. Search in Google Scholar

Varotto, S. (2011). Liquidity risk, credit risk, market risk and bank capital. International Journal of Managerial Finance, 7 (2), 134–152. DOI: 10.1108/17439131111122139. Apri DOISearch in Google Scholar

Zheng, G., Yu, W. (2014). Financial conditions index’s construction and its application on financial monitoring and economic forecasting. Procedia Computer Science, 31, 32–39. DOI: 10.1016/j.procs.2014.05.242. Apri DOISearch in Google Scholar

Articoli consigliati da Trend MD

Pianifica la tua conferenza remota con Sciendo