Keywords

Liquidity, Systematic Review, Risk-Taking Behaviour, Performance.

Introduction

Banks’ liquidity has been one of the interesting topics in the field of banking and finance since the aftermath of the 2007-2008 Global Financial Crisis (GFC). This is because abundant liquidity at the United State (US) banks derived the high risk-taking that had led to the 2007-2008 GFC. In addition, liquidity risk has been identified as one of the major factors that had led to the collapsed of banks across the globe during the crisis period. As a result, banking reforms by policy makers such as the Basel Committee on Banking Supervision (BCBS) has initiated new standards on liquidity to mitigate banks’ liquidity risk as an effort to reduce the possibility of a bank run and ensure the long-term stability in the banking industry. The two liquidity standards are the Liquidity Coverage Ratio (LCR) which requires banks to keep liquid assets that can cover at least thirty days of cash outflows during the crisis period. Also, the LCR are required to be held in the High-Quality Liquid Assets (HQLA). While the Net Stable Funding Ratio (NSFR) which require the bank funding of the medium and long-term loans to be carried out with stable funds that may not run during the crisis period (BCBS, 2010).

Similarly, academic scholars have emphasised the importance banks’ liquidity as well as its effects on the banks. For example, DeYoung and Jang (2016) stated that the Basel III standard is tantamount to the Tirole (2011) analysis for bank liquidity that centres on three main areas: maintaining liquid assets to aid short-term financing runs; issuing stable deposits that may not run; and holding significant levels of equity financing to indicate long-term solvency and thus minimise the possibility of runs. Also, scholars such as Acharya and Naqvi (2012); Drehmann and Nikolaou (2013); King (2013); Hong et al. (2015); Khan et al. (2015); Umar and Sun (2016); Huynh and Cong (2017); Dahir et al. (2017); Barua (2017); Hye and Lau (2017); Scheule and Wu (2017); Abobakr (2017); Raweh and Shihadeh (2017); and Rahma (2017) have divergent views and found that liquidity has significant effect on the bank risk-taking, liquidity creation as well as the performance.

Extant literature provided divergent views on the effects liquidity on banks. Also, the studies focus more on developed and transition economy which led to the paucity of studies on the issue of bank liquidity. For example, studies by Aizenman and Hoffmaister (2004); Aspachs et al. (2005); Berger and Bouwman (2009); Delechat et al. (2012); and Kashyap et al. (2002) provided an empirical benchmarks for considering the impact of liquidity regulations on banks and other sectors of the economy. They found that liquidity cushions are positively correlated with bank deposit and bank profitability but negatively related to bank size, market concentration, and the business cycle. Other studies by Bonner (2015); Bonner et al. (2016); and King (2013) maintained that though liquidity buffer help to reduce the banks risk-taking behaviour, however, it negatively affects liquidity creation as well as their performance. Accordingly, studies by Acharya and Naqvi (2012); Dahir et al. (2017); Hong et al. (2015); and Khan et al. (2017) are of the view that bank liquidity influences their risktaking behaviour as well as performance.

The purpose of this paper i