Liquidity Risk, Regulation and Bank Performance: Evidence from European Banks

Abstract

Motivated by liquidity risk issues from the 2007 financial crisis, this paper investigates the relationships between liquidity risk, regulation, supervision and bank performance by using a panel data of EU27 countries over 2001-2011. This study finds that liquidity risk is negatively associated with bank performance. Capital regulation, official supervision, and restriction on bank activity policies are positively related to bank performance while deposit insurance, private monitoring practices have negative relationship with bank performance. Capturing capital requirement and increasing power to official supervisors are much preferred in the market-based than in the bank-based countries.