Abstract:
The new Basel III Liquidity Coverage Ratio standard which
encourages banks to maintain a diversified pool of high-quality liquid
assets against their short-term expected net cash outflows although
it appears to be noble from a theoretic perspective it may weigh down
banks’ performance because liquid assets earn low returns. It is
against this background that this study sought to evaluate the impact
of the new Basel III liquidity regulations on the profitability of banks
in emerging market economies. A sample of 40 banks operating in
11 emerging markets over the period 2011 to 2016 was used in the
study. For estimation, system Generalized Method of Moments (GMM)
estimator was employed. Surprisingly, empirical results
demonstrated that regulatory pressure stemming from Liquidity
Coverage Ratio requirement increased instead of diminishing the
profitability of banks in emerging markets. The plausible explanation
given for this evidence was that banks in emerging markets managed
their liquidity in a manner that is consistent with Liquidity Coverage
Ratio rule hence the regulation had no detrimental effects on banks
in emerging economies.
