The purpose of this paper is to explore the relationship between bank regulatory capital and liquidity creation in banks of BIRCS countries.
Data from all publicly listed banks of BRICS nations for the period 2003-2014 have been collected and analyzed. Two-stage least-squares regression has been used to control endogeneity. The econometric model includes different control variables that have been selected based on the extant literature.
Increase in bank capital negatively affects bank liquidity creation which implies that “financial fragility-crowding out” hypothesis holds for banks of BRICS countries.
This study provides the evidence of the inverse relationship between bank regulatory capital and liquidity creation from emerging economies. The findings show that there is a trade-off between curtailing bank risk taking and liquidity creation. Therefore, the regulators must formulate policies to strike a balance between the two.
