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  • Research on impact of inflation on bank

    2018-10-22

    Research on impact of inflation on bank liquidity suggests that increased inflation decreases bank liquidity (Vodova, 2011; Moussa, 2015; Bhati et al., 2013). Contrary to this, our results suggest that as the inflation rate of an economy increases, banks begin to hold more liquidity to curb the effect of inflation on the economy. Tseganesh, (2012) also had similar findings.
    Conclusion and suggestions This study has significant implications for bankers, policy makers and consumers. Liquidity trends show that there is significant impact of ownership on bank liquidity. Private and foreign banks held more liquidity in the Indian banking system during the crisis period as compared to public banks. While holding greater levels of cash could be seen as a liquidity management strategy of foreign and private banks for ensuring adequate liquid ephrin receptor during crisis, government backing seems to be the most logical reason behind public sector banks in India holding relatively less cash. However, the fact that even during crisis, private and foreign banks considered in this study did not face liquidity crunch due to adequate reserves, is an encouraging one for customers, and strengthens the credibility of private and foreign banks operating in India. These findings are in contradiction with those of Delechat et al. (2012) who found that foreign banks held less liquid buffer than other banks. Dinger (2009) also had similar findings. The reasons behind such discrepancy in results in context of Indian banks are a subject for future study. The implications of this finding are that foreign and private sector banks need to maintain higher levels of liquidity to face crisis situations as they don’t have government backing like public sector banks (Acharya & Kulkarni, 2012; Eichengreen & Gupta, 2013).On the other hand, customers have reasons to show faith in these banks as they maintained healthy levels of cash even during crisis. Thus, it can be said that these banks are safe for customers to deposit their money. Another major finding of this study is that bank size has a negative relationship with liquidity. In other words, greater the bank size, lower the liquidity they hold. Majority of studies support the finding that bank size negatively affects bank liquidity (Bonfim & Kim, 2012; Bonner et al., 2013; Alger & Alger, 1999; Dinger, 2009; Vodova, 2013; Choon et al., 2013; Kashyap et al., 2002). One reason behind this may be that large banks are in a condition to create more liquidity as compared to smaller banks in crisis situations because they have easier access to the lender of last resort, and because they would be the first to benefit from the safety net (Distinguin et al., 2013). On the basis of the findings of this study, menstrual cycle can be said that managers of small banks should maintain high levels of liquidity because they may not be able to arrange funds as easily as large banks if such a need arises. Future research could look into how bank size affects bank liquidity under different types of ownership (public, private and foreign). In the present study, CAR was found to positively influence bank liquidity which implies that higher capital adequacy ratio leads to greater liquidity. This finding is in line with the recommendations of Basel III, and several other studies e.g., Tseganesh, (2012); Vodova (2013); Vodova (2011); Alger and Alger (1999). While there are other studies with contradictory findings (Choon et al., 2013; Munteanu, 2012; ), the study by Bhati et al. (2015) is particularly relevant due to its Indian context. Bhati et al. (2015) studied determinants of liquidity in Indian nationalized banks and found that capital negatively affected bank liquidity. It is noteworthy however, that our study has considered banks from private and foreign sectors also in addition with public sector banks which may be the reason behind discrepancy in results of the two studies. Higher CAR is expected to result in greater safety and higher liquidity for banks. Greater liquidity creation can also contribute to bank solvency and show the existence of a virtuous circle in favor of tightening capital requirements (Horváth et al., 2014).