Does Capital and Funding Liquidity Risk Affect Risk-Taking and Monetary Policy?

Authors

  • Sidra Gazali PMAS-Arid Agriculture University, Rawalpindi, Pakistan
  • Shumaila Zeb SZABIST, Islamabad, Pakistan
  • Akmal Shahzad Preston University, Islamabad, Pakistan
  • Anum Shafique PMAS-Arid Agriculture University, Rawalpindi, Pakistan

Keywords:

Monetary policy, Interest rate, Bank capital, Funding liquidity, Bank risk taking

Abstract

This paper examines how bank capital and funding liquidity risk influence the interplay between monetary policy and risk-taking among banks in the South Asian Association for Regional Cooperation (SAARC) region. The Generalized Method of Moments (GMM) model was employed to analyse panel data from 2009-18. The empirical findings indicate that the interest rate negatively affects bank risk-taking. Diverging from previous literature, this study provides evidence that bank capital and funding liquidity risk moderate the relationship between monetary policy and bank risk-taking. This is evident from the significant coefficients of both interaction terms. Banks with low capital and high funding liquidity risk exhibit increased sensitivity to interest rate changes, leading to greater variations in risk-taking behaviours. Consequently, it is advisable for regulators and policymakers to closely monitor liquidity and minimum capital requirement ratios, particularly for banks with lower levels of deposits and capitalisation. Furthermore, this study contributes to the literature by providing evidence that risk-taking is influenced by both bank capital and funding liquidity risk.

JEL Classification Codes: E52, D81, G21

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Author Biographies

Sidra Gazali, PMAS-Arid Agriculture University, Rawalpindi, Pakistan

 

 

Anum Shafique, PMAS-Arid Agriculture University, Rawalpindi, Pakistan

 

 

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Published

2024-01-18

How to Cite

Gazali, S., Zeb, S., Shahzad, A., & Shafique, A. (2024). Does Capital and Funding Liquidity Risk Affect Risk-Taking and Monetary Policy?. Journal of Development Policy, Research & Practice, 7(1), 31–47. Retrieved from https://journals.sdpipk.org/index.php/JoDPRP/article/view/72