Factors Contributing to

Liquidity Risk of Commercial

Banks in Bangladesh
Faika Nawar Noor
ID: 2022151084
Course Name: Bank
Managemnent & Financial
Services
Course Code: FIN4204
 • Background
• Literature Review
• Problem Statement
• Research Objectives
• Research Hypotheses
Content • Variable Selection
and Data Collection
s • • Methodology
• • Results and
Discussions
• Recommendations
•Conclusion
 Background
• Liquidity risk is a growing
concern for Bangladesh’s
banking industry
• The financial system’s stability is
in jeopardy due to the increasing
liquidity risk
• The determinants of banks’
liquidity risks is investigated in
this study
• Panel data of 10 DSE listed
banks for 5 consecutive years
from 2017 to 2022 has been
Literature Review
• Two kinds of variables have been used to
determine their contribution on liquidity
risk –
1. Bank specific variables &
2. Macroeconomic. variables

• The models used in the study are-

1. Pooled OLS
2. Fixed effect model
3. Random effect model
Problem Statement
A number of factors continuously lead
to a mismatch between the maturities
of assets and liabilities of commercial
banks causing liquidity risk
If deposits are abruptly . withheld or
lending declines, banks fail to fulfill
their short-term obligations
The projected outcomes of the study
will help understand the factors that
affect liquidity
Objectives
.

Objective 01
Determining the factors
influencing liquidity risk in
Bangladeshi commercial banks

Objective 02
Evaluating the relative significance Banking
of these variables.
Industries
Objective 03
Investigating how these elements
affect the Bangladeshi commercial
banks' liquidity risk
 Hypotheses
1. Ha1: There is both positive and negative
relationship between the size of the bank
and liquidity risk.
2. Ha2: There is a positive relationship between the
ROE of the bank and liquidity risk.
3. Ha3: There is a negative relationship between the
NPL of the bank and liquidity risk.
4. Ha4: There is a positive relationship between the
capital adequacy ratio of the bank and liquidity risk.
5. Ha5: There is both positive and negative
relationship between loans to advances ratio of the
bank and liquidity risk.
6. Ha6: There is a negative relationship between the
inflation and liquidity risk
Data Collection

Panel Data-
• Frequency: Yearly
• Period: 2017 to 2022
• Sources: Annual
reports and
government portals
Variable Selection

Variables Proxies
1. Liquidity Risk (LR) Liquid asset / Total asset
2. Size of Bank (S) Logarithm of total asset
3. ROE Net income/ Total equity
Bad debt/Loan and
4. NPL
advances
Net Income/Average of total
5. ROA
assets
6. Loans to assets ratio
Loans/Total assets
(DTA)
7. Inflation (INFL) -
8. GDP growth Real GDP growth rate
 Research
Methodology
Empirical Model
Variables Sampling Y = β0+ β1X1+ β2X2+
Models Used
1. Dependent Variable method β3X3 + β4X4+ β5X5+ 1.Pooled OLS
- Liquidity risk β6X6 + β7X7 + €
2. Independent -Random Where ,
2.Fixed Effect
Variables
-Size of bank
sampling Y= Liquidity risk 3.Random
- ROE β0= Constant Effect
- NPL β1-to β7= Regression
- ROA co-efficients of
-Loans to assets independent variables
ratio €= Error term
- Inflation
-GDP growth
Results & Discussions

Table : VIF with all the Independent Variables

Variable | VIF 1/VIF

roe | 1.42 0.706005

loan to asset ratio | 1.31 0.761401
roa | 1.26 0.791027
size of bank | 1.20 0.833921
npl | 1.16 0.858596
.
gdp growth | 1.11 0.900965
inflation | 1.09 0.918329
-------------+----------------------
Mean VIF | 1.22

All the values of VIF are less than 10, so there is no

multicollinearity
Results & Discussions

Table : Pooled OLS

Source | SS df MS Number of obs = 60

-------------+------------------------------ F( 7, 52) = 6.87
Model | .763711188 7 .109101598 Prob > F = 0.0000
Residual | .825493425 52 .015874874 R-squared = 0.4806
-------------+------------------------------ Adj R-squared = 0.4106
Total | 1.58920461 59 .026935671 Root MSE
= .126

.
----------------------------------------------------------------------------------
liquidity_risk | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-----------------+----------------------------------------------------------------
Size of bank | -.1381923 .0404014 -3.42 0.001 -.2192637 -.0571209
roe | .006603 .3860742 0.02 0.986 -.7681117 .7813176
npl | 2.468743 .7041877 3.51 0.001 1.055687 3.881799
roa | .000068 .0000156 4.36 0.000 .0000367 .0000993
loan to asset ratio | -.3425586 .1417025 -2.42 0.019 -.6269054 -.0582118
inflation | 3.766226 1.468969 2.56 0.013 .818525 6.713927
gdp growth | -1.516334 1.150136 -1.32 0.193 -3.82425 .7915825
_cons | 1.837608 .4482672 4.10 0.000 .9380938 2.737122
P-value for our model is 0.0000, which is 0.0000 < 0.05, indicating the model is significant at a 5% confidence
level. At the 5% level, the significant variables are size of bank, NPL, ROA, loan to assets ratio, and inflation
 Results & Discussions
Table : Fixed effect model

Fixed-effects (within) regression Number of obs = 60

Group variable: bank_dum Number of groups = 10

R-sq: within = 0.6426 Obs per group: min = 6

between = 0.0091 avg = 6.0
overall = 0.2068 max = 6

F(7,43) = 11.04
corr(u_i, Xb) = -0.2709 Prob > F = 0.0000

----------------------------------------------------------------------------------
liquidity_risk | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-----------------+---------------------------------------------------------------- .
sizeofbank | -.2271794 .0328922 -6.91 0.000 -.293513 -.1608459
roe | .7989823 .3771376 2.12 0.040 .0384117 1.559553
npl | .7012634 .6997447 1.00 0.322 -.7099063 2.112433
roa | .0000329 .0000152 2.16 0.036 2.24e-06 .0000636
DTA| -.2918742 .1310824 -2.23 0.031 -.5562271 -.0275214
inflation | 4.653409 .9763015 4.77 0.000 2.68451 6.622309
gdp growth | -1.114943 .7612258 -1.46 0.150 -2.650101 .4202151

At 5% confidence level, the significant variables are size of bank, ROE, ROA,
DTA, and INFL.
LRit = 2.722627 -.2271794S + .7989823 ROE +.0000329ROA -.2918742DTA + 4.653409INFL + uit
 Results & Discussions
Table: Random Effects Model

Random-effects GLS regression Number of obs = 60

Group variable: bank_dum Number of groups = 10

R-sq: within = 0.6198 Obs per group: min = 6

between = 0.0805 avg = 6.0
overall = 0.3462 max = 6

Wald chi2(7) = 64.43

corr(u_i, X) = 0 (assumed) Prob > chi2 = 0.0000

----------------------------------------------------------------------------------
liquidity_risk | Coef. Std. Err. z P>|z| [95% Conf. Interval]
-----------------+---------------------------------------------------------------- .
sizeofbank | -.2006155 .0340186 -5.90 0.000 -.2672908 -.1339403
roe | .5822836 .3763087 1.55 0.122 -.1552679 1.319835
npl | 1.370032 .6828886 2.01 0.045 .0315952 2.708469
roa | .0000487 .0000148 3.29 0.001 .0000197 .0000777
DTA | -.3131359 .1323004 -2.37 0.018 -.57244 -.0538319
inflation | 4.347151 1.050687 4.14 0.000 2.287842 6.406461
gdp growth | -1.252642 .8209556 -1.53 0.127 -2.861685 .3564014

At the 5% level, the significant variables are size of bank, NPL, ROA, DTA and
INFL .
 Results & Discussions
Table : Hausman Test
---- Coefficients ----
| (b) (B) (b-B) sqrt(diag(V_b-V_B))
| fe re Difference S.E.
-------------+----------------------------------------------------------------
sizeofbank | -.2271794 -.2006155 -.0265639 .
roe | .7989823 .5822836 .2166986 .0249906
npl | .7012634 1.370032 -.6687688 .1526626
roa | .0000329 .0000487 -.0000158 3.53e-06
loantoasse~o | -.2918742 -.3131359 .0212617 .
inflation | 4.653409 4.347151 .3062578 .
gdpgrowth | -1.114943 -1.252642 .1376989 .
------------------------------------------------------------------------------
b = consistent under Ho and Ha; obtained from xtreg
B = inconsistent under Ha, efficient under Ho; obtained . from xtreg

Test: Ho: difference in coefficients not systematic

chi2(6) = (b-B)'[(V_b-V_B)^(-1)](b-B)
= 75.17
Prob>chi2 = 0.0000
(V_b-V_B is not positive definite)

. As
the p-value, 0.0000 is less than 0.05 we can reject the null hypothesis and the correct model to be
used is the fixed effect model. The equation in this case:
LRit = 2.722627 -.2271794S + .7989823 ROE +.0000329ROA -.2918742DTA + 4.653409INFL
1. 2.
Banks should Net income,
cost
strive to
reductions, or
enhance both Recommen asset usage
ROE and ROA dations optimization
3. 4.
Properly
managing the
Though
loan portfolio
banks cannot
and asset base.
directly control
inflation, they can
manage its
repercussions
Thank you
very much!