Research On Liquidity Creation Of Syrian Banks

Liquidity creation is one of the essential functions of commercial banks in any economy,but this function has not received the attention required in the Syrian context until now.This study aims to explore the amount of liquidity created in the Syrian banking sector and to investigate its relationship with some of the main characteristics of the commercial banks;namely bank capital,CAMEL rating system and bank profitability.This study adopts the most comprehensive measurement of bank liquidity creation.Furthermore,it uses ordinary least squares technique,using panel data spanning the period 2004-2017 of all 15 commercial banks in Syria resulting in 171 bank-year observations.The findings show that,on average,the Syrian banking sector is not effective in creating liquidity,especially during wartime.The results also show that Islamic banks are the best to create liquidity in Syria and the Commercial bank of Syria,the only state-owned commercial bank,is the worst,and it destroys liquidity rather than creates it.The results of the regression analyses show that bank capital negatively affects liquidity creation which supports the financial fragility crowding-out hypothesis;high rates of capital lead to a lack of liquidity creation.High-capitalized banks and low-liquidity creation banks mainly drive the findings.The results also show that the CAMEL rating system can be used to predict the level of liquidity creation as its ratios show strong and significant effects.In liquidity creation-bank profitability relationship,the results show that liquidity creation negatively and significantly affects bank profitability which supports the bankruptcy cost hypothesis;liquidity creation can increase the level of illiquidity risk and subsequently reduce the profitability of banks and increase their probability of facing bankruptcy.High-performed banks and high-liquidity creation banks mainly drive the results.The results of the war effect show that the Syrian war has affected the relationships between the liquidity creation and the factors highlighted in this study;which leads to the need to take this factor into account by managers and decision makers as this war continues so far.The findings of the regression analyses are robust to use different measures of liquidity creation,to exclude Islamic banks,to eliminate the state-owned bank,to use a different time window and to use the lagged values of the independent variables.This study contributes to the literature in different ways:it extends the literature on the liquidity creation function by conductingthis research in a new environment(Syria),and it combines all the ratios of the CAMEL rating system to use it as a tool to predict the level of liquidity creation.Finally,it extends the literature on the relationship between bank capital and liquidity creation and the relationship between liquidity creation and bank profitability in Syria which belongs to lower middle-income countries(undeveloped country).