At first we test if the variables are stationary by Fisher Pλ test, and Table 6 shows that all the test statistics reject null hypothesis of non-stationary. Next we test for the instrumental variables for liquidity creation as Table 7, and results show that all the coefficient of size, teta, and GDP are significant. The R-square reaches 0.4306 represents that these factors do exactly explain almost half of the total variance, it implies this model fits to explain our endogenous variable, LnLC. Then we test for our purpose which is mention in chapter 3 (see Table 8). We regress the model for avroa, sigavroa, sharproa both in panel regression and panel IV regression models respectively. Note that the Davidson-MacKinnon F test statistics state the results of Davidson-MacKinnon exogeneity test, and the significance means this model is fitting to use IV regression. To avoid being too complex, we only present panel regression in place of panel IV regression. Likewise, if the Hausman Chi2 is significant, we would only present the fixed-effect result in tables.
In Panel A of Table 8, we state both the regression with and without regulation variables; clearly we can observe that coefficient of LnLC is positively significant in most results. This finding infers that the liquidity creation benefits bank performance.
Viewing the control variables, the SIZE and TETA term reflects a consistent result in each model; both are positively related to the bank performance, which supports the point of literatures of scale economies and risky operation of capital. Besides, the GDPC coefficients also suggest that the change in GDP couldn’t be reflected on performance right away but with lags on the next period. Among the regulatory variables, evidence shows that except the private monitoring power, both official supervisory power and restrictions on bank activities would cause a negative effect on
performance, this implies the government actions lead to more barriers than private sectors.
Next going to the Panel B of Table 8, this regresses on ROA volatility and finds an interesting implication. One could notice that LnLC is negatively linked with the ROA volatility; it refers that the liquidity creation can stabilize the ROA volatility and can lower the risk of bank. Size factor is negative significant to ROA volatility, this indicates that larger banks have more capabilities to control its risk and also suggest that scale economies do exactly exist. But the capital coefficients refuse to support the risk absorption theory, a possible interpret is that bank holds more capital and leads to a relative risky operation since the abundance of money, thus obtain a premium of risk.
Regulation coefficient terms show that the monitoring degree of private sector and restrictions on bank activities would decrease bank risk.
Panel C of Table 8 presents the results for risk-adjusted ROA. The coefficients of LnLC are all positive and significant at significant level = 0.1, it means that the liquidity creation performs a positive risk-adjusted return. But we found that size is negatively related to risk-adjusted ROA. Most capital coefficients are negatively significant at significant level = 0.1, implies though capital can enhance bank profitability, but consider to the risk-adjusted return, the risky operation would lead to a worsen return.
Since financial system is a crucial factor that determines the importance of bank in a country, therefore we next divide our subsamples in bank-based and market-based.
Table 9 exhibits the subsample analysis result split by financial structure, in Panel A first we find the endogeneity assumptions is not supported in bank-based countries.
LnLC is negatively significant at significant level of 0.01 in bank-based countries while a positive one at significant level of 0.1 in market-based countries. This
represents that liquidity creation would performs better in market-based countries than bank-based countries; this may be owing to the bank position in bank-based system cause them to compete with each other and lead to a relative small profit margin. Size is not significant in market-based systems but presents a better result in bank-based system, this indicates that scale economies only exists in bank-based countries so that it would be more powerful to compete with others. The capital effect remains positive in all situations, which states that banks can obtain profits by using capital.
Additionally, the regulation variables provide mixed results, and most coefficients are not significant and sensitive to profitability.
In Panel B of Table 9 the function of profitability stabilization of liquidity creation still holds both for bank-based and market-based countries, but size factor doesn’t seem to be so. Evidence show that scale economies points is only supported in bank-based countries and capital bring either bank-based or market-based countries risks. With regard to official supervisory power, the effect seems like very different.
Coefficients are positively related to sigavroa in bank-based countries, but negative in market-based ones. This means the supervisory of authority would cause lower the ROA volatility of banks in market-based countries, but risen the volatility in bank-based countries in contrast. The monitoring degree of private sector also works better in market-based countries than in bank-based. Then the restriction coefficients are only significant in bank-based countries. We think it might because bank activities are well-behaved in bank-based countries, that is, banks in market-based countries tend to operate more risky assets so that the risk control effect of all variables are obvious than in bank-based countries.
Next go to Panel C of Table 9, the result is noticeable, LnLC is positively related to risk-adjusted performance in market-based system but not significant in bank-based system, so liquidity creation fits to operate in a market-based system since it can
lower the risk effectively and bring about a positive risk-adjusted ROA. Compare to the bank-based system, though bank occupies a relative important situation, it still cannot improve its risk-adjusted return. It may be the case that banks in bank-based countries operate lesser risky instruments so that the liquidity creation wouldn’t bring any excess benefits. These finding suggests that it could be a non-linear relationship between liquidity creation and bank performance since liquidity creation can moderate risk to a certain extent, but has no effects or worse for more. Consider to the risk-adjusted return, scale diseconomies exist instead. Capital coefficients are mostly insignificant may be because that the risk just offsets the profit it brings. Results also indicate that all the regulation variables affect risk-adjusted return significantly in bank-based system.