SOLVENCY AND LIQUIDITY LEVEL TRADE-OFF: DOES IT EXIST IN CROATIAN BANKING SECTOR?

Ana Kundid Novokmet, Antonia Marinović

Abstract


We focus on 32 Croatian banks in the period 2002-2010 in order to investigate the solvency-liquidity nexus. Dynamic panel data analysis is applied on two basic models in which current liquidity ratio and equity to assets ratio are set as dependent variables, interchangeably. Bank profitability measured with the return on assets, asset quality approximated with the non-performing loans indicator, macroeconomic environment proxy with GDP variable and bank size were explanatory variables in both models. We found two-way positive relationship between bank solvency and liquidity. However, bank size plays an important role in the capital and liquidity management, and trade-off between the solvency and liquidity level is found for the larger banks. Therefore, policymakers should take into consideration capital and liquidity interdependence, as well as the bank size effect when designing capital and liquidity requirements in order to downsize the regulatory burden for smaller banks, and increase them for larger banks.


Keywords


banks; liquidity; solvency; banking regulation; Croatia

JEL Codes


G21, G28

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References


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DOI: http://dx.doi.org/10.1515/saeb-2016-0132

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