Factors Shaping Liquidity Dynamics in the Banking Sector of Pakistan

This is the authors' abstract. We don't add key points for this paper.

Purpose: This study aims to investigate the liquidity creation determinants in the banking sector of Pakistan. Design/Methodology: Panel data from 24 banks is used for the period of 12 years (2011-2022). The impact of macroeconomic variables (economic growth and inflation) and bank-specific variables (income diversification, bank capital and bank size), is checked on liquidity creation. Liquidity creation is measured by the BB technique introduced by Berger and Bouwman (2009). The generalized Method of the moment (GMM) is used as a statistical technique to test the causal relationship among the variables of interest. Findings: The outcomes of this study show that among three bank-specific variables two variables; bank capital and size are significantly linked with liquidity creation. Inflation and economic growth are also significantly related to liquidity creation. The relationship between income diversification and liquidity creation is insignificant. Implications: This research will help to propose changes in current banking regulations and economic factors to improve liquidity creation. This research will also help the policymakers and managers of banks in developing policies and making decisions regarding the creation of liquidity. Originality: To the best of the author's knowledge this is the first study that emphasizes the determinants of liquidity creation in the banking sector of Pakistan.