Asian

n Journal of F
Finance & Acccounting
ISSN 19946-052X
2022, Vol. 14,
1 No. 1

T
The Imppact of Capitaal on Baank Liq
quidity:: Case of
o
T
Tunisiaa
Ben Mousssa Moham
med Aymen
Dooctor in Finaance
Faculty of economic ssciences and
d managemeent of Tuniss
Univversity of Manar
M

Receiveed: March 1,
1 2022 Accepted:
A M
May 30, 202
22 Pub
blished: Junne 1, 2022
doi:10.55296/ajfa.v14i1.18946 URL: ht
https://doi.orrg/10.5296/ajfa.v14i1.118946

Ab
bstract
Caapital and liiquidity are two importrtant variablles in bankiing industryy. Capital iss needed
to allow
w a bank too cover any y losses wiith its ownn funds. Alsso liquidityy is fundam mental to
achievee the financiial requiremments of bannk activity. The aim off this articlee is to determ
mine the
impact of capital on bank liiquidity. W We used a sample
s of 11 banks in Tunisia between
b
(2005…….2020). Byy applying a method off panel static (fixed efffects) we fouund that cap pital has
a positivve effect onn bank liquidity.
Keywords: Capitaal, bank, liqu
uidity, Paneel static, fixed effects

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1. Introoduction
The term m “liquidityy” has two related butt distinct meeanings in finance.
f Ann asset is liqquid if it
can be bought or solds quicklyy in size wiithout moviing the pricce. An instittution is liq
quid if it
can meet its schedduled paym ments or dem mands for funds
f witho
out incurring
ng high costts. Bank
liquidityy refers to the
t latter meeaning but aalso dependds on the former. A bannk is liquid if it can
repay borrowers whenw due, meet deposit withdrawalls, and satisfy draws onn lines of crredit that
it has eextended wiithout payinng inordinatately in fund
ding marketts or sellingg assets at fire-sale
prices. Moreover, because baanks providde funding to each oth her, liquiditty problemss at one
bank caan quickly spillover
s to other
o bankss.
Capital is supposedd to protect a bank from m all sorts of
o uninsured d and unsecuured risks apt
a to
turn intoo losses. Thhis is where we get to th
the two prinn- cipal funcctions of cappital – to ab
bsorb
losses aand to build and maintaain con- fideence in a baank. Capital is needed tto allow a bank to
cover anny losses with
w its own funds.
The objjectif of ourr article is to
t analyse thhe impact of
o capital on
n bank liquiidity. We will
w use a
methoddology of 3 sections. The first ssection is devoted to literature review. In second
sectionw
we will makke the empirical study. We finish by b conclusion of researrch.
2. Literrature revieew
A-Bank
k liquidity
Diamonnd; Rajan (22001) defined bank liqquidity as th he degree off ease of connverting assets into
cash soo that bankss can meet their obliggations on timet withouut incurringg any unexceptable
losses. L
Liquidity caan also be defined
d as thhe cash avaailable with the banks tto meet requuests for
withdraaws from depositors
d or
o requests for borrow wers when granting
g creedit to indiividuals,
compannies or goveernment.
Liquiditty is the ability of the bank to funnd asset gro
owth and meet
m its obliigations as they
t fall
due witthout incurrring acceptable losses (BIS (2008 8)). Indeed,, the Basel Committeee (2009)
explained that thee viability ofo commerccial banks depends on n the liquiddity position
n of the
bank.
Traditioonally, bankks basically
y function aas financial intermediaries and ccollecting points
p of
fund foor differentt groups wiithin the soociety. Theerefore, ban
nks are exppected to maintain
m
adequatte liquidity in order tot efficientlly perform their daily
y obligationns such as meeting
depositoors’ demannd or withdrrawals, settlling wholessale committments and provision ofo funds
when boorrowers drraw on committed creddit facilities (FSC, 20 0).
B-Bankk capital
First, caapital is thee accounting
g residual thhat remains after subtraacting a bannk’s fixed liiabilities
from its assets. Seecond, it iss what is oowed to thee banks’ ow wners—its sshareholderrs—after
liquidatting all the assets at thheir accounnting value. Third, it iss the bufferr that separrates the
bank froom insolvenncy: the poiint at whichh its liabilitiees exceed th
he value of assets.

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More ccapital tendds to absorb b adverse shocks and d thus redu

uces the likkelihood off failure
(Rime(22001)). Bannks raise caapital when the portfollio risk goes up in ordder to keep up their
capital bbuffer as siggned by Leaaven and Leevine (2002
2).
The assset portioon of a bank'sb cap ital includ des cash, government
g t securitiees, and
interestt-earning looans (e.g., mortgages,
m letters of crredit, and in
nter-bank looans). The liiabilities
section of a bank's capital inclludes loan-lloss reserves and any debt
d it owes..
Asa buuffer; capitaal will help p to protectt debtholdeers; includin
ng small deepositors and
a their
agents; the depositt insusrancee agency, froom the conssequences ofo financial distress. By
y having
more caapital; it is easier for a bank to abbsorb lossess when hit by
b an adverrse stock; avoid the
risk of ddefault; andd be able to go on.
C-The relationshiip between capital and
d bank liqu
uidity
Using U US data; Berger
B and Bouwman (2009) fou und that th
here is a poositive relaationship
betweenn capital and a liquiditty creationn for the large
l bankss; while thhere is a negative
n
relationnship for thee small bank
ks.
Hovarthh and al (20012) examin ned the relaationship beetween capittal and liquuidity creation. This
issue iss interestingg because off the potenttial impact on liquidity
y creation ffrom tightenn capital
requirem ments suchh those in Basel
B 3. Thhey performmed Grangeer causalityy test in a dynamic
d
GMM ppanel estim mation frameework on exxhausitive data
d of Czecch banks; fr from (2000… …2010).
They shhow that caapital negattively grangger causes liquidity crreation in thhis industry y; where
majorityy of banks area small.
Distinguuin and al (2013)
( inveestigated thee relationship between bank regullatory capitaal buffer
and liquuidity for Euuropean and d US publiccly banks. On
O the wholle;they finnd that bank ks do not
strengthhen their reegulatory caapital bufferr when they y face higher illiquiditty as defineed in the
Basel IIII accords or when th hey create more liquiidity as meeasured by Berger; Bo ouwman
(2009))). Their resuults show smmall banks ddo actuallay y strengthen
n the solvenncy standards when
they aree exposed too higher illiquidity.
Ilyas annd Sarwar (2018) explo ored the imp
mpact of ban nk capital onn liquidity ccreation in Pakistan
P
by usinng data set of the ban nks of Paki stan from (2004…201
( 13). The annalysis is based
b on
various classificatiions of the banks
b (overaall; small; medium;
m larrge).
Using ggeneralizedd least squaares (GLS) model; th he results sh how the poositive relaationship
betweenn the desired variables for large baanks and neegative for small
s and m
medium bank ks.
Danismman (2018) explored
e th
he impact off bank capittal on bank liquidity oof 21 Turkissh banks
for the period (20001…2017)). The findiings indicaate that the liquidity ccreation of Turkish
banks hhas dramaticcally increassed over tim
me and it is primarily driven by larrge banks.
Besidess Xie (20166) investigaated the rellationship between
b liq
quidity creat
ation and caapital in
China. This issue is
i interestin
ng because oof the potenntial impactt on credit w
weakness problems
p
from tiighten capiital requireements whiile proposeed by new capital ruules in Ch hina. He
perform
med regresssion analyssis in simuultaneous equation model m on tthe panel data of
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chineassebanks; whhich mainly

y includes 228 commerccial banks from
f (2004 …2014). He
H found
that staate owned commercial
c l banks do not have significant
s relationship
r p between liquidity
l
creationn and capitaal.
Higher capital tendds to mitigaate the finanncial fragiliity and enhaances the bbargaining power
p of
the bannks, which hampers the t credibillity of its commitmen
c nts to depoosits. Thuss higher
capital ttends to deccrease liquid
dity creationn.
In addiition; Gortoon, winton (2017) shoow that a higher
h capiital ratio caan reduce liquidity
l
throughh another eff
ffect “the cro
owding out of depositss ”.
Le (20018)investiggated the interrelation
i nip between n liquidity creation annd bank caapital in
Vitenammese banking between n (2007…22015). The findings sh how that laarge banks mainly
contribuuted a stronng growth in liquidityy cration in n Vietnamee between ((2007…201 15). The
findingss alos indiccate that offf balance ssheet activitties only pllayed a smaall role in liquidity
l
creationn. In addition the finddings indicaate a negatiive 2 way relationshipp between liquidity
l
creationn and bank capital
c in Vietnam.
V
Kayan and al (20221) examin ned the effeect of regulatory capitaal and ownnership struccture on
bankingg liquidity creation in
n emerging Asian eco onomies. We
W find a ppositive asssociation
betweenn regulatorry capital and
a bank l iquidity creeation, whiile inconsisstent with the risk
absorption hypotheesis.
3. Emp
pirical studyy
3.1 Metthodology
We willl use a sam
mple of 11 banks
b (Attijjari bank; Amen
A bank; ATB; BIAAT; BT; BT TEI; BH,
STB, B
BNA,UIB; UBCI)includ
U ded in finanncial markett of Tunisiaa for the pperiod (2005
5..2020).
We makke a methoddology of paanel static ((estimation by fixed efffects).
The tem
mporal and individual dimension
d oof our samp
ple allows usu to use thee approach of panel
data whhich offers great poten ntial analys is by tracking individu ual behavioor over timme. Panel
data havve also the advantage of increasinng the samp ple size, this leads to inncrease the number
of degrree of freeddom and red duce the prooblem of co ollinearity between
b exp
xplanatory variables
v
improviing hence reesults estim
mates. (Zaghhdoudi and Hakimi
H (2017)).
3.2 Speecification of
o model
We estiimated The following model:
m

(1) ALA i,t = b0+b1

b ROA
Ai,t +b2 RO
OEi,t +b3 NIMi,t
N +b4 Sizei,t
S +b5 TLAi,t +b6
6 CAPit
+b7CEAi,tt

+b8. CF
FCi,t +b9.T
Tdepositi,t +b10
+ TPIB
Bi,t +b11 TIINFi,t +Ei,tt
B0= connstant
B1, b2…
……b11: Paarameters to
o be estimatted

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i= bankk ; t= time
Ei,t = E
Error term
Table 1.specificatioon of variab
bles

Variab
ble Name Measure

ALA Liquid asssets Liquid asset

ets / total asseets

ROA Return onn assets Net incomee / total assets

ROE Return onn equity Net incomee / total equitty

NIM Net intereest margin Net intereest income / total

equity

Size Bank sizee Logarithm oof total assetts

CAP Capital Total capitaal / total asseets

CEA Operatingg costs Operating ccosts / total assets

a

CFC Financial credits Financial expenses / total

credits

Tdeposiit Part of deeposits Total depossits / total asssets

TPIB Economicc growth GDP Growtth

TINF Rate of innflation Growth of iinflation

We willl estimate thhe following

g hypothesiis:
H 1: Baank capitall have a significant efffect on ban
nk liquidity
H2: Baank capital don’t havee a significaant effect on bank liqu
uidity

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Table 22. Descriptivve statistics

Variab
ble Ob
bservationss Mean Stan
ndard Minimum
m Maxiimum
deviiation
ALA 1766 0.0285 0.02
225 0.0028 0.104
426

TLA 1766 0.775 0.11

142 0.12 0.9817

ROA 1766 0.012 0.00

094 0.000881 0.097
75

ROE 1766 0.111 0.06

631 0.0029 0.297
76

NIM 1766 0.026 0.01

132 0.0083 0.16391

Size 1766 15.35 0.92

2 12.52 18.29
9

CAP 1766 0.1051 0.06

632 0.0086 0.48

CEA 1766 0.032 0.02

26 0.000237 0.35

CFC 1766 0.038 0.01

153 0.01849 0.1689

T deposit 1766 0.7657 0.11

181 0.099 0.956
6

TPIB 1766 0.022 0.03

361 -0.1051 0.064
4

TINF 1766 0.061 0.01

167 0.0340 0.08543

ALA (M Mean = 0.00285). The liquid asseets represen nt on averagge 2.85% oof total assets. The
standardd deviation is not high h. CD (meann = 1.193). Total credits represennt on averag
ge 1.193
of totall deposits. The
T standarrd deviationn is high. There
T is big
g differencee between banks
b in
term off part of creddits to deposits.
Also TLA (mean = 0.775). Total loanss representt on averag ge 77.5% oof total asseets. The
standardd deviationn is not high
h. There is no big diffference betw
ween bankss in term off credits.
ROA (m mean = 0.0012). Net in ncome repreesent on avverage 1.2%% of total asssets. The standard
s
deviatioon is low. There
T is no big
b differencce between banks in term of ROA A.
Besidess ROE (meaan = 0.111).. The net inccome represent on average 11.1%% of total equuity.The
standardd deviation is not high
h. Also NIMM (mean =0.026). Net interest
i marrgin represeent 2.6%
of total assets. Thee standard deviation
d bbetween ban
nks is low. The net intterest margiin is not
very diffferent betw
ween the bannks of sampple.
Size (m
mean =15.335). The most of banks are medium
m size.
CAP (m
mean =0.10551). The equ
uity represeent on averaage 10.51% of total ass ets.

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CEA (m mean = 0.0032). The operating

o coosts represeent on average 3.2% oof total assets. The
standardd deviation is low. Theere is no bigg difference of CEA between bankks of samplee.
CFC (mmean =0.0388). The finaancial expennses represent on averrage 3.8% oof total cred dits. The
standardd deviation is low. Theere is no bigg difference of CFC bettween bankks of samplee
Tdeposit (mean =00.7657). Tottal deposits representt on averagee 76.57% off total assetss.
T PIB (mean = 0.022).
0 The average ecoonomic grow
wth is 2.2%
% in the periiod (2005… …2020)in
Tunisiaa. There is negative
n eco
onomic grow
wth in 2022 because off negative efffect of COV
VID19.
TINF (m
mean =0.0661). The aveerage inflatiion is 6.1% in the perio
od (2005…22020) in Tun
nisia
Table 3.Multicolinnearity test

ALA CD TLA ROA ROE NIM Size CAP

ALA 1.000

CD 0.0730 1.000

TLA -0.08444 -0.1949 1.000

ROA -0.16844 0.1631 0.1191 1.000

ROE -0.21500 -0.1616 -0.1176 0.3921 1.000

NIM 0.0158 0.0833 0.2478 0.1073 0.0834 1.000

Size 0.0973 -0.2745 0.1577 0.0857 0.3635 0.255 1.000

CAP -0.07755 0.6962 0.1346 0.2912 -0.1852 0.0615 -0.3575 1.000

CEA 0.2036 0.0159 -0.0661 -0.0267 0.075 -0.0641 0.1237 -0.0076

CFC -0.03788 -0.0258 -0.0117 -0.0076 -0.047 -0.1476 0.1384 -0.0227

Tdepossit -0.23855 -0.5547 0.0531 0.0169 0.3814 -0.0711 0.4336 -0.6191

TPIB 0.0604 0.0589 -0.1125 0.0679 -0.0117 -0.0250 -0.2505 0.0123

TINF -0.11988 -0.0893 0.3496 -0.0374 0.2111 0.043 0.4291 -0.1064

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Table 44.suite of correlation beetween variaables

CE
EA CFC Tdeeposit TPIB TINF
F
CEA 1.0000

CFC 0.33142 1.000

Tdepossit -0..1459 -0.1598 1.00

00

TPIB -0..1394 -0.2233 -0.0303 1.000

TINF 0.11031 0.1271 0.16

602 -0.5512 1.000

All the coefficientss are inferio

or to 0.80. T
There is no problem
p of multicoline
m earity
Table. V
VIF

Varriable VIF 1/VIF

T deeposit 2.20 0.4542
CAP
P 2.13 0.4689

TIN
NF 1.90 0.5260

Sizee 1.67 0.5992

ROE
E 1.56 0.6422

TPIIB 1.53 0.6519

ROA
A 1.43 0.6720

TLA
A 1.31 0.762

CFC
C 1.27 0.788

CEA
A 1.17 0.825

NIM
M 1.12 0.8902

Variancce inflation factor (VIF) is a me asure of th he amount of o multicolllinearity in a set of

multiplee regressionn variables. Mathematiically, the VIF for a regression model varriable is
equal too the ratio of
o the overaall model vaariance to thhe variance of a modell that includ des only
that sinngle indepenndent variaable. This rratio is calcculated for each indeppendent variable. A
high VIIF indicatess that the asssociated inddependent variable
v is highly
h colliinear with the other
variablees in the moodel.
VIF infferior to 5. There is no
o problem of multicollinearity.

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Hausm
man test
In paneel data anaalysis (the analysis
a of data over time),
t the Hausman
H teest can helpp you to
choose between fixxed effects model
m or a rrandom effe
fects model. The null hyypothesis iss that the
preferreed model is random efffects; The aalternate hyp pothesis is that
t the moodel is fixed d effects.
Essentiaally, the tessts look to see if theree is a correlation betwween the uniique errors and the
regressoors in the model.
m The null
n hypotheesis is that there
t is no correlation
c bbetween thee two.
In yourr case prob Chi2 = 0.075(it is supperior to 5%
%). There fo
or we use eestimation of
o model
random
m effect.
Table 55. Results off estimation
n of model ( 1)

ALA Coeffficient Z Z<

<P
ROA -0.149
9 -1.06 0.2291
ROE -0.028
8 -1.20 0.2228
NIM 0.024 0.27
7 0.7785
Size 0.005214 2.14
4 0.0032
CAP 0.023182 2.56
6 0.00547

CEA 0.06535 1.45

5 0.1148
CFC -1.087
7 -1.20 0.2229
Tdepossit -0.025
5 -1.35 0.1176
TLA -0.003
305 -2.22** 0.00228
TPIB 0.0133 0.36
6 0.7718
TINF -0.202
26 -2.11** 0.0035
Constannt -0.013
3 -0.46 0.6648

There iis a negativve relationsship betwe en ALA ett ROA (if ROA increease by 1% %. ALA
decreasse by 0.1499%). The in ncrease of return on assets has a negativve impact ono bank
liquidityy. This resuult if similarr to result fo
found by Mo
orina; Qarrii (2021);AlQ
Qudah (20
020) but
contraryy to result found
f by Al Homaidi annd al (2019), Gjorgi an
nd Goran (22019).
There iis a negativve relationsship betweeen ALA an nd ROE (iff ROE incrrease by 1% %, ALA
decreasse by 0.0288%). The increase
i off return on equity hass a negativve impact on o bank
liquidityy. This resuult is contrary to resuult found byy Agawal (22019).Also there is a positive
relationnship betweeen NIM and d ALA (if N NIM increasse by 1%, ALA
A will inncrease by 0.024%).
0
The inccrease of nett interest maargin has a positive im
mpact on ban
nk liquidity..

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There iis a positivee relationsh hip betweenn Size and ALA A (if Size increasee by 1%, ALA
A will
increasee by 0.0052%). The increasei off size has a positive effect
e on b ank liquidiity. This
relationnship is statiistically significant at 11%. This reesult is similar to resultt found by Homaidi
H
and al ((2019); Masshamba (202 22)
There is a positivee relationshiip between capital and d bank liquiddity (if capiital increasee by 1%
ALA inncrease by 0.023%).
0 Thhe increase oof capital has a positive effect on bbank liquiddity.
This ressult is simillar to found
d by (Gjorggi and Goran n (2019)). Al
A Homaidii and al (20
019), but
contraryy to result found
f by Xiie (2016); G
Gorton and Winton
W (2017).Singh aand Sharmaa (2016);
Vodovaa (2011) fouund that ban nk capital haas a positivee impact on
n bank liquiddity.
There iis a positivee relationsh
hip betweenn CEA and bank liquid dity (if CEA
EA increase by 1%;
ALA w will increasee by 0.065%%). The incrrease of opeerating costss has a posiitive effect on bank
liquidityy.
There iis a negativve relationshhip betweenn CFC and d bank liquiidity (if CFFC increase by 1%,
ALA w will decreasee by 1.087% %).The incrrease of finnancial expeenses has a negative effect
e on
bank liqquidity. Bessides there is
i a negativee relationsh
hip between deposits annd bank liquuidity (if
depositss increase by
b 1%; liqu uidity will ddecrease byy 0.025%). The
T increasse of deposiits has a
negative impact onn bank liquidity. This result is sim milar to result found bby Bista and
d Basnet
(2020)
There iis a negativve relationsh
hip betweenn TLA and d bank liquidity (if TL LA increase by 1%;
ALA wwill decreasee by 0.0030 05%). The iincrease of total loans by total asssets has a negative
n
impact on bank liqquidity.
Also thhere is a possitive relatio
onship betw
ween ALA and
a TPIB (if TPIB inccrease by 1%%; ALA
increasee by 0.0133%). The in ncrease of economic growth has a positivve impact ono bank
liquidityy. This ressult is similar to resullt found by
y (Fola (20
015)); Bundda and Dessquilbert
(2008)
There iis a negativve relationship betweeen ALA and TINF (iff TINF incrrease by 1% %: ALA
decreasse by 0.20266%). The in ncrease of innflation has a negative impact on bbank liquidiity. This
result iss similar to result found by Bista aand Basnet (2020) but contrary too result founnd by Al
Qudah((2020).
Conclu
usion
Bank caapital is the difference between
b a bbank's assetss and its liab
bilities, and it representts the net
worth oof the bank oro its equityy value to innvestors. Th
he asset portion of a bannk's capital includes
cash, goovernment securities,
s and
a interest--earning loaans (e.g., mortgages,
m leetters of creedit, and
inter-baank loans). The
T liabilitiies section oof a bank's capital
c incluudes loan-looss reserves and any
debt it oowes. A bannk's capital can be thouught of as th he margin to o which credditors are co overed if
the bankk would liqquidate its asssets. On thhe other hand d bank liquiidity is veryy important to the
ability oof a bank to meet its fin
nancial obliggations as th
hey come du ue. It can comme from dirrect cash
holdinggs in currenncy or on account at the Federaal Reserve or other ccentral bank k. More

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frequenntly, it comees from acquuiring securrities that caan be sold quickly

q withh minimal lo
oss. This
basicallly states higghly creditw
worthy secuurities, com mprising of governmennt bills, whiich have
short term maturitiies.
If their maturity is short enouugh the bankk may simp ply wait for them to retturn the prin nciple at
maturityy. For shortt term, very safe securitties favor to
o trade in liq
quid marketts, stating th
hat large
volumees can be solld without moving
m pricces too much and with low transacction costs.
Neverthheless, a baank’s liquidity conditioon, particulaarly in a crisis, will bee affected byb much
more thhan just thiss reserve of cash and hiighly liquidd securities. The maturirity of its lesss liquid
assets w
will also matter.
m As of
o them m may mature before the cash crunnch passes, thereby
providinng an additiional sourcee of funds. ((tutorialpoin
nts.com)
In this aarticle we sttudied the impact of caapital on bank liquidity
y in Tunisia . We used a sample
of 11 bbanks throuugh the peeriod (2005 .2020). Wee found thaat capital hhas a posittive and
significcantimpact on
o bank liqu uidity.
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