Does economic growth affect the relationship between banks' capital, liquidity and profitability: empirical evidence from emerging economies

Abstract

PurposeThis research explores the role of economic growth to influence the inter-relationship between capital, liquidity and profitability of commercial banks in selected asian emerging economies.Design/methodology/approachTo achieve the research purpose, an empirical model was constructed to examine the role of economic growth in the inter-relationship between banks' capital, liquidity and profitability. The empirical model was tested through two stage lease square (2SLS) regression analysis using annual data of Asian commercial banks ranges from 2011 to 2019.FindingsThe findings indicate that bank capital and liquidity are interdependent and determined simultaneously. The outcome demonstrates that the strength of the inter-relationship between banks' capital, liquidity, and profitability improves when economic growth is taken into account in the analysis. The results report that market funding, loan ratio, credit risk, bank size and bank efficiency are significant indicators to influence commercial banks' liquidity, profitability and capital in Asian emerging economies. The findings are heterogeneous across large, medium and small-sized banks in emerging economies of Asia.Practical implicationsThe results highlight that the model provides robust results with respect to sign and significance. However, the coefficient remains underestimated without incorporating economic growth, which has important implications for decision-makers and bankers.Originality/valueTo the best of authors’ knowledge, this is the first study that examines the role of economic growth to influence the inter-relationship between capital, liquidity and bank profitability in the emerging economies of Asia.