Bank capital and bank stability: The mediating role of liquidity creation and moderating role of asset diversification
Year: 2023
Type: article
Abstract: Regulators and managers in the banking sector prioritize the banking system’s stability and safety to limit risks, shocks, and potential losses. This study reveals why a bank is more or less stable via bank capital, liquidity creation, and asset diversification. We form a structural model in which bank capital affects stability through liquidity creation, and asset diversification moderates the relationship between liquidity and stability of banks. We employ a moderated mediation model and the Partial Least Squares Structural Equation Modeling (PLS-SEM) with panel data on 27 commercial banks publicly listed in Vietnam from 2014 to 2021. Surprisingly, the empirical results show that raising bank capital reduces liquidity creation while lowering liquidity creation increases bank stability. Thus bank capital has a positive impact on stability via the mediating role of liquidity creation. Moreover, the relationship between liquidity creation and bank stability is moderated by “asset diversification”. Higher asset diversification mitigates the detrimental impact of liquidity creation on bank stability and vice versa. Finally, this study recommends using bank capital, liquidity creation, and asset diversification to bolster bank stability.
Source: Cogent Business & Management
Authors: Thanh Huu Vu, Trung Thanh Ngo
Institution: Ho Chi Minh City Open University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: gold
Estimated APC paid: $1,165
Funder: Đại học Mở Thành phố Hồ Chí Minh
Award: G4115352798
OpenAlex ID: W4367626739