Bank Liquidity under Economic Shocks：Evidence from Taiwanese Commercial Banks

Bank Liquidity under Economic Shocks：Evidence from Taiwanese Commercial Banks

Maintaining suitable liquidity is vital for commercial banks, serving as a financial bedrock to meet customer demands, handle deposits, extend loans, and manage financial crises. Even seemingly robust banks risk collapse without adequate liquidity, impacting customers and the broader financial landscape. Safeguarding depositors' rights and ensuring system stability is crucial for banks. Policymakers need to grasp liquidity's importance in navigating the complex factors affecting banks' stability, particularly in Taiwan's financial market. This study aims to illuminate this relationship, offering insights for institutions in stable and volatile periods. To investigate that relationship, liquidity is measured by two proxies: asset-based (LQ) and non-liquidity (NLQ). The bank-specific attributes include profitability (ROA), Asset Quality (Non-Performing Loans), and Customer Deposit ratio, while two macroeconomic indicators are Industrial Production Index growth rate (IPI) and Inflation. The data consists of 33 domestic commercial banks in Taiwan, which is obtained from the Taiwan Economic Journal (TEJ) and spans the years 2010–2023. We employ the Quantile Regression Method to examine the potential for varying influences of the aforementioned relationships at different bank liquidity levels. The results suggested that: (1) Profitability positively affects all levels of banks' LQ liquidity but negatively affects banks with lower NLQ liquidity. (2) Asset quality negatively impacts banks with medium to high LQ liquidity and those with low NLQ liquidity, yet it benefits banks with higher NLQ liquidity. (3) Customer Deposit ratio positively affects all banks' LQ liquidity but harms banks with medium to high NLQ liquidity. (4) Macroeconomic variables affect LQ liquidity: IPI negatively impacts medium to high LQ liquidity while Inflation positively impacts LQ, but neither affects NLQ liquidity. Additionally, we analyzed the impact of COVID-19 on these relationships and our findings confirm its influence. Furthermore, we explored how bank size moderates the relationships mentioned earlier. The results show that bank size indeed moderates the relationships between bank-specific variables and both LQ and NLQ liquidity. This research offers key insights into the dynamics of bank liquidity in Taiwan, aiding policymakers in developing resilient regulations and assessing the impact of bank size on liquidity.