This study investigates the impact of liquidity on the profitability of 50 large European banks, measured by Return on Average Assets (ROAA), Return on Average Equity (ROAE), Net Interest Margin (NIM) and Profit Before Tax (PBT), during the period 2009-2015. The aforementioned relationship is examined during this period in order to determine the effect of liquidity, after a financial crisis in which liquidity had an important role. To this direction, seven bank specific and two macroeconomic variables were employed in a panel dataset with 350 observations. In the past, most studies used liquidity ratios to determine liquidity risk and thus in this study, we focus on employing not only ratios, but also liquidity measures derived directly from the banks’ balance sheets, in order to get a more general view on the impact of liquidity in the banking sector. Regarding the results, they showed that for ROAA, ROAE and PBT, all liquidity measures derived from the balance sheet and the liquidity ratios had a negative impact on profitability. In contrast the capital ratio that was used as a proxy to regulatory imposed liquidity was positively related. On the other hand, regarding NIM, there were some differences in the results with Cash and Due from Banks and Net Loans to Total Assets be positively related with profitability, while the capital ratio of Tier1 to Total Assets was negatively related with NIM. According to the results of the study, banks should maintain their liquidity levels mostly though their capital reserves (e.g. Tier 1 Capital) and take actions to mitigate the credit risk of their investments, as well as their financing gap which imposes constraints in their funding procedure.
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